FUNDING OF GROUP LIFE INSURANCE

Transcription

1 TRANSACTIONS OF SOCIETY OF ACTUARIES 1955 VOL. 7 NO. 18 FUNDING OF GROUP LIFE INSURANCE CHARLES L. TROWBRIDGE INTRODUCTION T RADITIONALLY the group life insurnce benefit hs been finnced on yerly renewble term bsis. Other methods of funding cn be nd hve been employed, but the one yer term method is the simplest nd most nturl pproch so long s the life insurnce benefit is promised during ctive employment only. During the pst decde, however, there hs been growing demnd for continution of some or ll of the group life insurnce benefit fter the employee's retirement from ctive employment. It is logicl tht funding of ny postretirement benefit be t lest prtilly completed by retirement. The retired employee feels more secure with funded benefits; the prudent employer wishes to budget his costs for employee welfre benefits over the period of the employee's ctive service. The high nd shrply incresing term premium t ges bove 65 bolsters both viewpoints. There re other resons why the vrious forms of group permnent' insurnce, which employ different methods of funding thn the trditionl one yer term, hve been developed. One is tht the vilbility of insurnce reserves mkes possible (but in no wy mkes necessry) termintion-of-employment benefit, distributble either s csh or s pid-up insurnce. Such benefit is helpful in encourging n employee to join contributory pln or to contribute more thn he would otherwise consider resonble; nd it brings the premium on conversions down within rech. It is the generl purpose of this pper to look into the vrious methods pproprite for funding the typicl group life benefit. Prt I introduces certin concepts, ssumptions, nd nottion necessry for the lgebric development. Prt II describes the funding methods commonly employed to fund simple group life insurnce benefit. The lgebr is developed for ech method (under the rigid conditions of n initilly sttionry popultion), nd the reltionships between ultimte contributions nd ultimte reserves re studied by mens of n "Eqution of Mturity." Prt III looks into the chrcteristics of the vrious methods under less idel conditions. Prt IV presents certin nlogies with the funding of pension ' It should be noted tht group permnent for pension purposes is outside the scope of the pper. 270

2 FUNDING OF GROUP LIFE INSLrRANCE 271 plns, nd Prt V sttes the present sitution with respect to employee txbility under the vrious funding methods. I. FUNDAMENTAL CONCEPTS, ASSUMPTIONS, NOTATION Eqution of Mturity Under the common cturil concept tht ny group of sufficient size cn be ssumed (for wnt of better informtion) to pproch mture or sttionry condition eventully, the ultimte popultion cn be represented by the l I column of n underlying "service" tble. If mounts of insurnce re equl for ll members of the group, it is pprent tht the sum of the d~ column of the service tble is representtive of the eventul yerly clims. If mounts of insurnce vry (e.g., by slry), it is possible to construct different l'. column 2 representtive of mounts of insurnce, insted of number of lives, nd gin the eventul level of clims is represented by Ed~. It is chrcteristic of ll of the funding methods here under considertion tht, t some time coincident with or fter the time the popultion becomes sttionry, the yerly contribution to the pln lso becomes sttionry. Similrly the reserve becomes sttionry. It is thus pprent tht in the mture stte ultimte benefits (B), ultimte contributions (C), nd ultimte reserves (F) re relted by the eqution C(1 q- i) -k if = B, ssuming the contribution is pyble t the beginning of the yer, deths occur t the end of the yer, nd F is defined s the reserves on hnd t the end of the previous yer, fter pyment of benefits for tht yer but before receipt of the yer's contribution then flling due. This eqution will be found to hold for ll the funding methods, nd is herefter referred to s the Eqution of Mturity. Life insurnce premiums re lmost invribly clculted on single decrement tble. Since the premiums re clculted without "discount for turnover," withdrwl benefit rises under most of the permnent forms. This withdrwl benefit my go to the terminting employee, or it my revert to the employer s credit ginst future premiums. In ny event it cn be viewed s prt of B in the Eqution of Mturity bove. Assumptions The cturil nlysis of prticulr funding method is mterilly simplified if mture popultion is ssumed, not fter mny yers, but right from the inugurtion of the pln. The nlysis of the initilly m- t This tble my involve n increment s well s the usul deth nd withdrwl decrements.

3 272 FUNDING OF GROUP LIFE INSURANCE ture popultion is undertken first, but observtions nd illustrtions s to the more relistic sitution follow in Prt III. Unless otherwise indicted the lgebric sttements found in this pper re bsed on the following: Assume popultion, sttionry from the moment the pln is estblished, such tht the number ttining ge x in given yer is l'.. Assume two decrements, deth nd withdrwl, represented by d~ nd w, respectively, such tht l; - d'- - w, - l~-1. Both decrements re ssumed to occur t the end of the yer. Assume further tht w, is zero for ll ges bove retirement ge r, nd tht the pln provides unit of deth benefit for ech of the l," lives both before nd fter retirement ge r. Funds ern interest t rte i. Imgine lso column of l" from single decrement mortlity tble such tht l'.+~/l" = 1 - dl/ll Assume tht premiums re chrged nd reserves held on this mortlity tble with rte of interest i. This ltter ssumption hs the effect of ignoring expenses nd eliminting gin or loss from mortlity or interest nd is employed, not becuse the ssumption is relistic, but becuse this pper ttempts to study funding methods only. Nottion Let be youngest ge in the service tble, so tht the sttionry popultion is supported by l~ new entrnts yerly. Let c0 be the limiting ge of the service tble. Let Ct represent the tth nnul contribution to the insurnce pln, pyble nnully in dvnce, nd F, the fund (or reserve) built up fter t yers (fter benefits but before contributions then due); superscripts to the left indicte the funding method under considertion. Let prime on ny of the usul cturil functions indicte tht it is clculted on the tble l~ nd rte of interest i. One Yer Term II. DESCRIPTION OF FUNDING METHODS As previously stted, the simplest nd most common funding rrngement employs the principle of one yer term insurnce. No contributions re mde to the pln beyond those necessry to meet benefit pyments expected to fll due within the yer for which the contribution is mde. Under the conditions ssumed, contributions, TC~, with yer's interest, re exctly equl to benefits for ll vlues of t, nd rft is zero for ll vlues of I. There re no withdrwl benefits. Since the initilly mture popultion previously described produces constnt deths, One Yer Term funding for such group produces level

4 contributions equl to FUNDING OF GROUP LIFE INSURANCE 273 TC l = V X. Retirement Funding If One Yer Term funding is employed with respect to ll ctive lives, but if the present vlue of future deth benefits is contributed for ech life s it reches retirement, we hve wht might be clled "retirement" funding. When Retirement funding is pplied to n initilly mture popultion, ll contributions except the first re equl nd cn be expressed s r--1 "c,>, = ~ dl+z:a'. The principle of full funding for retired lives requires, however, tht the first contribution be considerbly greter to fund the benefits of those lredy beyond retirement ge t the time the pln is inugurted. The initil contribution is in fct r--1,c, =vx; d:+ For ll vlues of t, r c,f, = r+l nd the Eqution of Mturity cn be checked out by the identity [~ + t~a'r (+i) + -- d:. r+l Note tht no withdrwl benefits re included on the right side of the eqution becuse One Yer Term funding is employed for the period during which withdrwls other thn by deth re ssumed to tke plce. Ordinry Life Funding Suppose n ordinry life net premium P~' is computed for ges nd bove on the single decrement mortlity tble l~'. Under Ordinry Life funding premium P~ is pid with respect to ech of the l'~ people t ttined ge x, where z is the ge the insurnce becme effective. It is pprent tht the initil premium is ~1 = 2 l;p',

5 274 FUNDING OF GROUP LIFE INSURANCE the premium in the tth yer is +t--i "C,= gp'-t+~+ ~ gp', nd fter to - yers the ultimte premium, +t is reched. At the end of ech yer, however, n ordinry life reserve is relesed r--i with respect to ech of the ~ wx withdrwls. In the ultimte sitution the mount of such relese cn be expressed by r--1 ~ W z" z_+iv t. tt This relese is best viewed s n dditionl benefit, or s reduction to premium, depending on whether "vested" in the employee by the terms of the pln. rf~o is seen to be tt, l..._.v', q-1 nd the Eqution of Mturity is expressed by the identity ~I~'P" (1 +i> q-i~l:..-~v:----- ~ +l tt ds,+ ~w,.,-~+lv" It is pprent tht under this method of funding, for the mture popultion ssumed, the initil contribution is high; but the contribution decreses stedily s the ordinry life verge premium ge decreses. If withdrwl benefits re nonvested, the premium credits lso increse, further reducing the net contribution. The ultimte net contribution for identicl benefits is certinly lower thn under One Yer Term, nd lso generlly lower thn under Retirement funding, Under vritions of this method the ordinry life premium is pid to retirement only, with the ordinry life reserve providing portion o[ the insurnce fter retirement on pid-up bsis while the reminder is filled out (1) by one yer term, or (2) by purchse of dditionl pid-up life. s The truth of this lst sttement in specific cse depends on the ggregte ordinry life reserve for ll employees exceeding the single premium life reserve for retired employees.

6 FUNDING OF GROUP LIFE INSURA_NCE 275 These "to retirement only" vritions of ordinry life funding re of theoreticl, rther thn prcticl, interest. Life Pid-Up t Retirement Another method of funding, in mny wys similr to Ordinry Life funding, employs level "life pid-up t ge r" premium in lieu of ordinry life. Anlysis similr to tht for ordinry life shows tht the ultimte contribution under this method is nd the ultimte reserve r--1, P" L.F~ ~ I" "-V' - ~ " ' The Eqution of Mturity then becomes,. o (1 +i) +i tl.,_'.v" +, 2 I±" ~ +l t'+l +l r+l f'--i ~t This method produces higher initil contributions, higher ultimte reserves, nd lower ultimte contributions, thn other methods previously discussed. A common modifiction of the method employs ten pyment life for those initilly beyond or within ten yers of retirement, in order to reduce the otherwise high contributions for the very erly yers. After ten yers this modifiction produces identicl results, under the conditions ssumed, s the unmodified form of Life Pid-Up t Retirement funding. Unit Pid-Up Still nother rrngement is tht sometimes known s the "unit pidup" pln. Here level "pid-up" premium is estblished, usully constnt for ech thousnd of insurnce, nd pyble from the time the insurnce becomes effective until retirement. Ech pyment of the estblished "pid-up" premium is pplied t the ttined ge to purchse s much pid-up life insurnce s it will. Insurnce in excess of the ccumulted pid-up insurnce purchsed with respect to given ctive employee is provided on one yer term bsis. If, s ssumed here, insurnce is to be continued fter retirement, term insurnce fter retirement would likewise be equl to fce less ccumulted pid-up.

7 276 FUNDING OF GROUP LIFE INSURANCE The cturil nlysis of this pln is somewht more complicted thn those previously considered. It is pprent tht the "pid-up" portion of the ggregte premium is r--1 where p is the constnt premium per life (or per thousnd of insurnce). If the mount of pid-up insurnce in force for n individul ge x, t yers fter the pln commences, be represented by eii~, it is evident tht under the rigorous conditions ssumed ~-~ 1 x< +t tii~ = P ~ A--S x< r,- I +t< - x< r _ r-t 1 -t'~ x>r x>+t r-1 1 After t exceeds r -, the second nd third forms become inpproprite nd the expression for,1-i. becomes Z--1 1 r-1 1 x>_r If p is so estblished tht ~IL(x > r) is not greter thn unity,* the term premium for yer t is simply v ~ c 1 d." (1 - -L+1) * This ssumption is desirble for the purposes of this pper, since the gol is to compre different funding methods s they pply to identicl benefils. As prcticl mtter p cn be set high enough so tht pid-up insurnce exceeds fce sometime prior to retirement.

8 nd eventully FUNDn,~G OF GROUP LIFE INSURANCE 277 to v~ d~ (1 - oori~+l). The ggregte reserve fter t becomes greter thn r -- is +I nd the reserve relesed by termintions '--1 ~w,.. G I~x+ 1 " At~+l It is n interesting exercise to prove out the identity expressing the Eqution of Mturity, r--i to,. [p21:+ X; ] 2" t+l v d; (1-- ooli,+~) (1+i) +~ ~.MI,.A'~, r--1 + ~ w,. ooifiz+ 1Ats+ 1. tt The ultimte level of contributions (nd ultimte level of reserve) under Unit Pid-Up funding will depend considerbly on the vlue of p. If p is estblished such tht r--1 I the ultimte sitution will be very similr (but not identicl) to tht under Life Pid-Up t Retirement funding. If p is zero, Unit Pid-Up funding is, of course, identicl to One Yer Term. If z we should expect ultimte reserves nd premiums to pproximte rther closely the first of the "to retirement only" modifictions of Ordinry Life funding. One Yer Term nd Pension Funding At lest from theoreticl point of view it is fesible to use One Yer Term funding for ctive lives nd ny one of severl funding methods

9 278 FtrNI)Ii, CO OF GROUP LIFE INSIYRANCE commonly employed for pension plns to fund the fter retirement deth benefit. Prcticlly, this would involve the mintennce of self-dministered or deposit dministrtion fund from which purchse of single premium life insurnce is contemplted t retirement, or from which one yer term premiums fter retirement would be pid. This method is then, in effect, n dvnce funded form of wht we hve chosen to cll Retirement funding, or it my be thought of s n dvnce funded form of the fter retirement portion of One Yer Term funding. Pension funding methods hve been dequtely described elsewhere nd no further description is needed here. It might be well to point out tht pension funding methods, in contrst to insurnce funding methods, often employ discount for turnover. The following is the pproprite Eqution of Mturity ssuming tht the "entry ge norml" method of funding, with discount for turnover, is the funding method employed s to the fter retirement portion: r--! ~o +l :r-- I,)] ± d* In this eqution, deferred ssurnces nd temporry nnuities re clculted on the service tble l', rther thn the single decrement tble l-'. Illustrtion of Initilly Mture Sitution To illustrte the foregoing discussion of vrious funding methods under the ssumption of n initilly mture popultion, numericl clcultion hs been mde, the results of which re shown in Tble 1. The l~ column of the hypotheticl sttionry popultion is mde up of 1,000 ctive lives (ges ) nd 150 retired lives (65 nd bove), mintined by 100 entrnts ech yer ll t ge 30. Ech yer 10 ctive lives retire, 5 die, nd 85 withdrw. The 10 new retired lives ech yer exctly replce 10 others who die. Deth rtes re not fr different from current group life mortlity prior to retirement nd re pproximtely equivlent to the Stndrd Annuity q,'s t retired ges. The verge group term premium ge is just under 45 for ctive lives, nd bout 58 when retired lives re included. Tble 1 illustrtes the yerly contribution nd build-up of funds under ech of the severl funding methods, ssuming 2½% interest nd deth benefit of $I,000 for ech employee (ctive or retired). For Life Pid-Up t Retirement funding the 10 pyment life modifiction hs been em-

10 TABLE I--INITIALLY MATURE YEAR O1~ YT~AR TERM I Active Retired Tott RETIRE- MENT~ ORDINARY Lt~z* LIFZ PAID-Ur AT RI~TIIDr.- MEN'I~- t0 PAYI~ENT MODIFICATION* Premium Withdrwl Premium Withdrwl Vlues Vlues U~,wr PAXD-UP* Premiumt Withdrwl Vlues EsrlY AGE NOR~L$ CONTRIBUTIONS AND WITHDRAWAL VALUES I... I4,878 $9,756 $14, ~ u " = " = u $122,773 11~931 = 138,475 36,079 34,402 31,646 26,763 25,954 23,155 $1,281 2,345 3,182 4,409 6,057 6,272 6,909 $51,964 49,048 46,899 43,249 36,478 21,497 19,214 $1,759 3,192 4,520 5~921 7,854 8,080 8,704 $28,841 28,711 28,566 28,276 27,422 27,242 26,425 $1,245 2,280 3,140 4,429 6,359 6,647 7,611 $ 24~014 u u = '~ = 21, " " " 20,675 20,285 7,386 7,447 17,578 17,359 9,112 9,158 25,246 24,992 8,522 8,660 K 8, " " " " " = 17,820 16,526 7,642 7,642 16,336 16,219 9,287 9,287 22,413 19,531 9,185 9,185 u " " = Limit... " " " 16,1)47 15,926 7,642 7,642 16,219 16,219 9,287 9,287 17,357 16,136 9,185 9,185 8,644 RESERVES AT EI~rDOF YEAR i ;iliiiiiiiiiiiiiiiiiilliiiiiill Limit...,... $110~842 K u u = $ 23,156 43,371 61,536 92, , , , , , , , , ,749 $ 36,504 69,499 99, , , , , , , , , ,506 3O6,5O6 $ 13,317 25,799 37,584 59, , , , , , , , , ,839 $ 9,614 19,469 29,570 50,537 I07,714 t20, , ~600 N 245,600 * To get net contribution for nonvested benefits subtrct withdrwl vlue from t Term portion of contribution sme s ctive column of One Yer Term [unding. nextl, sueeeedlng premium. ~ Pid-Up Premium $14,344--reminder Term.

11 280 FLrNDING OF GROUP LIFE INSURANCE ployed. For Unit Pid-Up funding p hs been chosen to be $14.34 (not quite SI.20 per month), which will produce $I,000 of pid-up insurnce t retirement for those entering t ge 30. For One Yer Term nd Pension funding, entry ge norml (with discount for turnover) with 20-yer pyment of the ccrued libility hs been illustrted. A true comprison of yerly outly for identicl benefits is obtined by treting the withdrwl vlues shown s credit ginst the next premium. III. MODIFICATIONS FOR INITIALLY IMMATURE FUND The foregoing nlysis of the initilly mture sitution is helpful for thorough understnding, but the initilly immture sitution is much more importnt from prcticl viewpoint. Surely very few employee groups hve reched nything pproximting mture condition, especilly in regrd to the number of retired lives. We now bndon the condition tht the group is initilly mture, lthough we retin the concepts tht the popultion will eventully pproch sttionry condition nd tht cturil ssumptions will be relized. The equtions previously set out still hold, except tht (1) the tp, l~'s of the service tble re replced by the l~ s of the immture popultion, with corresponding modifiction of the d:'s nd w~'s, nd (2) the identities expressing the ]Eqution of Mturity do not hold fter this substitution until such time s the l~'s pproch the l~'s. If the initil group is immture it follows tht One Yer Term funding will produce contributions which re initilly low, but which increse nd eventully level off when mturity o[ the group is ttined. An increse in the one yer term premium is not uncommon in plns providing no insurnce fter retirement. It is much more likely nd much steeper if fter retirement insurnce is included, both becuse of rise in the verge premium rte nd becuse of n increse in totl insurnce provided. Retirement funding is lso likely to produce generlly incresing contributions under conditions of n initilly immture group, lthough the increse should not be s mrked s under one yer term. Moreover, contributions re likely to fluctute rther widely s the number of retirements vries from yer to yer. In generl the decresing cost tendencies of Ordinry Life nd Life Pid-Up t Retirement funding re relized even if the popultion mtures. Under Unit Pid-Up funding, two tendencies work in opposite directions. The verge premium ge per thousnd of term insurnce my well rise s verge ge increses, nd totl insurnce increses lso--but the

12 FUNDING OF GROUP LIFE INSURANCE 281 portion of the insurnce on term bsis continully decreses. For resonbly lrge vlues of p, the over-ll term premium is likely to increse rther slowly if it doesn't ctully fll. Tble 2 is numericl representtion for n initilly immture popultion. The ssumed initil popultion contins 1,000 ctive lives with verge term premium ge just over 40, with no retired lives. If this group experiences deth nd withdrwl exctly in ccordnce with the service tble underlying Tble l, nd ff sufficient new entrnts come in t ge 30 ech yer to keep the ctive stff up to 1,000, the initilly immture popultion will slowly pproch tht shown by the service tble. Once gin comprison of outly for equl benefits cn be obtined by compring premiums less withdrwl vlues. The withdrwl vlue column in itself is n indiction of the cost of "vesting." IV. ANALOGIES WITH PENSION :FUNDING The methods of funding previously touched upon under the heding "One Yer Term plus Pension Funding" point out some of the differences nd similrities between the funding of the group insurnce benefit nd the funding of typicl pension benefit. Both group insurnce nd pension plns provide n importnt benefit fter retirement. One is of the form Ax, the other d~, but in mny wys the funding of deth benefit of $1,000 fter retirement is identicl to tht of funding n nnul pension benefit of 1,000 A,/d, One would expect to find similr methods employed--s in fct they re. More pronounced differences rise before retirement. The group insurnce pln provides currently enjoyed deth benefit prior to retirement; pension pln, while it my crry supplementl deth or withdrwl benefits, in its typicl form offers nothing until retirement. Secondly, discount for turnover is not commonly employed in group insurnce plns. Becuse of the differences pointed out bove, group insurnce funding methods nd those employed in pension funding cnnot be identicl. In mny wys they re, however, nlogous. A fuller understnding of both pension nd insurnce funding will be obtined if the student pprecites the similrities between some of the methods discussed in this pper nd those previously described for pensions, s If we dopt pension terminology to point out the rther obvious nlogies, One Yer Term funding is essentilly py-s-you-go. Retirement funding is nlogous to wht is commonly known mong pension cturies s terminl funding. Life Pid-Up t Retirement is very similr to individul level premium funding. Unit Pid-Up with its One Yer 5 "Fundmentls of Pension Funding," TSA IV, 17.

13 TABLE 2--INITIALLY IMMATURE YZAR I Active ONE Y~ TEm Retired Totl RETIRE- MENT~ O~DINAR~ LIFE* Llzz PAID-UP AT RETIRE- MENT'--- I0 PAYM EICY MODIFICATION* Premium Withdrwl Premium Withdrwl Vlues Vlues UNIT PAID-UP* Premium~ Withdrwl Vlues ENTRY AG~ NomALt CONTRIBUTIONS AND WI~VdDRAWAL VALUES $3,832 3,996 4,119 4,320 $ $ 3,832 3,996 4,314 4,675 $ 3,832 5,407 6,234 7,476 $20,205 19,885 19,622 19,206 $1,420 2,555 3,423 4,597 $28,011 27,419 26,918 26,093 $1,886 3,283 4,528 6,057 $18,062 18,111 18,305 18,412 $1,416 2,553 3,458 4,704 $ 13,349 13,513 13,636 13, ,6O4 4,640 1,504) 1,674 6,104 6,314 10,029 10,181 18,605 18,525 6,092 6,293 24,748 20,838 7,836 8,054 19,070 19,104 6,455 6,721 14,121 14, ,678 2,859 7,627 10,645 18,252 6,999 18,962 8,796 19,643 7,735 14, ,898 4,921 4,415 4,723 9,313 9,644 11,031 11,092 17,923 17,851 7,633 7,702 17,521 17,323 9,428 9,487 20,200 20,281 8,809 8,957 14,415 8, ,133 7,442 12,575 12,891 17,107 7,570 16,361 9,203 20,503 9,104 8, ,807 9,512 14,319 11,807 16,559 7,611 16,219 9,245 19,115 9,141 8, ,850 10,084 14,934 11,691 16,088 7,644 16,219 9,287 17,343 9,185 8,616 Limit... 4,878 9,756 14,634 11,931 15,926 7,642 16,219 9,287 16,136 9,185 8,644 RESERVES AT E~D OF YEAi 1... ' t ! , ill Limit... $ 0 1,446 3,451 8,935 29,236 33,931 51,730 70,918 74,176 95, , , ,842 $ 15,361 29,476 42,481 66, , , , , , , , , ,749 $ 22,897 44,095 63, , , , , , , , , , ,506 $ 13,170 25,414 36,932 58, , , , , , , , , ,839 $ 9,755 19,753 29,802 50, , , , , , , , , ,600 * To get net contribution for nonvested benefits subtrct withdrwl vlues from t Term portion of contribution sme s ctive column of One Yer Term funding. next succeeding premium. $ Pid-Up Premium $14,344--reminder Term.

14 FUNDING OF GROUP LIFE INSURANCE 283 Term supplement is not very different from money purchse pension funding supplemented by py-s-you-go. V. TAX SITUATION AS TO THE VARIOUS I~IYNDING METHODS It is pprent from previous discussion tht wide vriety of funding methods is vilble to fund the group life benefit, just s there re multitude of methods for funding the typicl pension benefit. For both benefits the simplest type of funding--one Yer Term funding for insurnce, py-s-you-go for pension--hs n incresing cost tendency in n initilly immture sitution, nd under some circumstnces t lest this chrcteristic is unstisfctory. One would expect, therefore, degree of development in lternte methods for funding group insurnce somewht similr to tht which hs tken plce in pension funding. As mtter of fct the development of the dvnce funded forms of group life insurnce hs lgged fr behind its pension counterprt. Prt of the explntion lies in the tendency to discontinue group life insurnce fter retirement. Under these circumstnces the simple one yer term rrngement is generlly quite stisfctory (note from Tble 2 how much of the increse in contributions is due to fter retirement insurnce). Another, nd perhps eqully importnt, explntion lies in the current income tx sitution s it pplies to the insured employee. The premium pid under the trditionl one yer term rrngement is nontxble to the employee, not by specific provision of lw, but s result of Lw Opinion 1014, issued in Ever since 1920 the Federl Tx Regultions s hve included the sttement "Premiums pid by n employer on policies of group life insurnce covering the lives of his employees, the beneficiries of which re designted by the employees, re not income to the employees." Congress hs given stture to this old Lw Opinion by permitting it to remin effective over period of 35 yers. It is to be noted tht this Lw Opinion 1014 nd the current Regultions mke no distinction between term nd permnent insurnce, nd the tx exempt tretment would pper to pply to group life insurnce generlly. Mimeogrph 6477 issued in 1950 indictes, however, tht the Tresury position s to the permnent forms of group insurnce is quite different. This Mimeogrph declres the entire premium for ny permnent form txble to the employee, except to the extent it is contributed by the employee himself, nd except s provided in prgrph 5 of Mimeogrph 6477 quoted below: 5. Where premium for insurnce would be required to be included in the income of n employee in ccordnce with the foregoing rules but the right of Most recently Reg ()-3.

15 284 FUNDING OF GROUP LIFE INSURANCE the employee to permnent insurnce or equivlent benefits, other thn current term insurnce, provided by the premiums is forfeitble in cse of subsequent seprtion from service, the insurnce is not considered permnent form when the premium is pid nd nothing is required to be included in the employee's income on ccount of the premium pyment. The vlue of ny permnent insurnce or equivlent benefits in which the right of n employee chnges from forfeitble to nonforfeitble in cse of subsequent seprtion from service is considered premium pid for permnent form of insurnce t the time of the chnge nd such vlue, less ny employee contributions on ccount of the chnge, is required to be induded in his income for the yer in which the chnge OCCUI~3. This prgrph seems to imply txbility to the employee t retirement, if not before, unless some unusul provisions regrding forfeitbility fter retirement re incorported. It should be noted tht Mimeogrph 6477 does not pply to group permnent insurnce written in conjunction with n pproved pension pln. Tht Mimeogrph 6477 hs slowed, if not stopped, the development of group insurnce funding on other thn one yer term bsis is unquestioned. In conjunction with the tretment of one yer term, Mimeogrph 6477 hs the peculir effect of mking the employee's tx sttus s to n identicl economic benefit (i.e., deth benefit pyble in event of deth either before or fter retirement) dependent on the employer's choice s to how such benefit shll be pid for. Lw Opinion 1014 nd Mimeogrph 6477 seem in this respect to be bsiclly inconsistent. As result of Mimeogrph 6477 "green light" txwise seems to be given to only two, or possibly three, of the methods of funding discussed in this pper. The first is the trditionl One Yer Term. The second is Unit Pid-Up, if nd only if the permnent premium p is pid entirely by the employee. The fvorble tx tretment of this contributory form of Unit Pid-Up is result of its premium flling nturlly into two prts, (I) group term premium crrying the tx dvntge enjoyed by ll one yer term, nd (2) permnent premium nontxble to the employee becuse it is contributed by the employee himself. There is feeling in some qurters tht dvnce funding methods cn be employed without incurring employee txbility through the route discussed under the heding "One Yer Term nd Pension Funding." If the funds ccumulted re used to py the periodic group term premiums fter retirement, rther thn the simpler nd cturilly similr procedure of single premium purchse t retirement, some bsis for this viewpoint is seen to exist. Whether this route might involve nondeductibility of employer contributions to the "side fund," the uthor, for one, does not pro-

16 FUNDING OF GROUP LIFE INSURANCE 285 less to know. In ny event if employee txbility cn be legitimtely voided through this route, s some believe, then this possibility serves to point up once gin the inconsistency between Lw Opinion 1014 (crried down to the present in Regultions 118) nd Mimeogrph Future development of other group insurnce forms seems to hinge to lrge extent on future chnge in the tx sitution.