Chapter 7

Question 1

What is Multilife Underwriting?

Answer 1

• Underwriting of groups of life insurance applicants
• Uses nontraditional approaches to risk selection
• Includes guaranteed issue (GI) and simplified issue (SI)

GI does not include traditional individual underwriting, while SI includes fewer underwriting requirements than full underwriting.

Question 2

What are the two types of underwriting included in Multilife Underwriting?

Answer 2

• Guaranteed issue (GI)
• Simplified issue (SI)

GI does not require traditional individual underwriting, while SI has fewer requirements than full underwriting.

Question 3

What types of products does Multilife Underwriting utilize?

Answer 3

• Universal life
• Variable life
• Private placement products

It can also involve corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI).

Question 4

Why is Multilife Underwriting an important topic to learn?

Answer 4

• Growing share of new business written in BOLI
• Need for next generation of leaders in BOLI and guaranteed issue underwriting
• BOLI cash value was over $182 billion in September 2020

The size of BOLI assets suggests a continuing need for BOLI leaders.

Question 5

What does COLI stand for?

Answer 5

Corporate-Owned Life Insurance

The term COLI no longer fully identifies the multilife market but was primarily characterized by plans for executives.

Question 6

What percentage of the Fortune 1000 is believed to have nonqualified programs utilizing COLI?

Answer 6

More than 75%

The COLI marketplace has evolved, and while it remains significant, other forms of OLI have emerged.

Question 7

What is the primary purpose of BOLI?

Answer 7

Cost-efficient means for banks to offset rising employee benefit costs

BOLI can informally fund employee obligations like executive retirement plans and deferred compensation plans.

Question 8

What does CHOLI stand for?

Answer 8

Charity-Owned Life Insurance

CHOLI is designed to insure multiple lives on behalf of a charity or foundation.

Question 9

What is the purpose of CHOLI?

Answer 9

To provide an assured stream of ongoing revenue to the charity from life insurance

Also known as foundation-owned life insurance (FOLI).

Question 10

What is the primary focus of all multilife underwriting?

Answer 10

Avoidance of anti-selection

Anti-selection is minimized through traditional underwriting techniques when evaluating individual insurance applicants.

Question 11

What are the two types of plan designs in multilife underwriting?

Answer 11

• Voluntary plan designs
• Nonvoluntary plan designs

Nonvoluntary plans have compulsory participation and fixed coverage amounts, reducing anti-selection risks.

Question 12

Define nonvoluntary plan designs.

Answer 12

Plans where participation is compulsory and coverage amounts are predetermined

Coverage can be based on salary multiples, flat amounts, or other established formulas.

Question 13

Define voluntary plans.

Answer 13

Plans where participation is optional and coverage amounts can be chosen by participants

These plans are more susceptible to anti-selection.

Question 14

What is the significance of eligibility in multilife underwriting?

Answer 14

Determines which employees can participate in the plan

Clear eligibility guidelines help ensure proper enrollment and adherence to agreed requirements.

Question 15

What are the benefits of a clear definition of eligibility?

Answer 15

• Guidelines for management on enrollment
• Guidelines for plan administrators
• Confidence for insurers in consistent eligibility

Helps ensure that appropriate newly eligible participants are insured.

Question 16

True or false: Traditional underwriting tools are generally used for multilife business, especially GI.

Answer 16

FALSE

Traditional underwriting tools are typically not used for multilife business, particularly Guaranteed Issue (GI).

Question 17

What is the role of evidence in voluntary plans?

Answer 17

Requires some measure of evidence for coverage

This evidence is less than traditional full underwriting.

Question 18

What does SI stand for in the context of multilife underwriting?

Answer 18

Simplified Issue

SI programs involve limited underwriting compared to traditional methods.

Question 19

What is the difference between executive and nonexecutive eligibility in multilife programs?

Answer 19

Eligibility can depend on whether the employee is an executive or not

This distinction affects underwriting methods like Guaranteed Issue (GI).

Question 20

What are the eligibility requirements for a multilife plan?

Answer 20

Criteria must be strictly followed to establish expected overall mortality

Failure to adhere can lead to unprofitability due to excessive and unexpected claims.

Question 21

Define executive in the context of eligibility for multilife plans.

Answer 21

• Based on title (e.g., all vice presidents and above)
• Based on salary (e.g., employees with annual salary of $100,000 or more)
• Based on equity ownership or other definable measures

The definition impacts underwriting and tax advantages.

Question 22

What are the implications of including nonexecutives in a multilife plan?

Answer 22

• Pricing may need to be adjusted upwards
• Availability of GI or SI underwriting may be contingent on the group being executives only

Nonexecutives typically have less favorable aggregate mortality experience.

Question 23

What is the significance of key person status in multilife plans?

Answer 23

Required for maximum tax benefits on certain multilife plans

Defined in the IRS tax code and the Pension Protection Act of 2006.

Question 24

How does plan design impact underwriting decisions?

Answer 24

Structure of the plan is crucial for evaluating multilife plans and GI or SI underwriting offers

A straightforward plan can reduce the risk of anti-selection.

Question 25

List reasons for potential **adverse mortality** in guaranteed issue plans.

Answer 25

* Older lives tend to have higher coverage * Small groups do not allow for the same spread of risk ## Footnote A single claim can significantly impact overall group mortality in small groups.

Question 26

What does **spread of risk** refer to in multilife plans?

Answer 26

Insurance permitted on any one life relative to the size of the group ## Footnote It also relates to the average death benefit for the group.

Question 27

True or false: A **maximum death benefit** can be determined based on the size of the group.

Answer 27

TRUE ## Footnote There is an upper limit over which insurance becomes too risky, regardless of plan design.

Question 28

What is a **flat amount upper limit** in life insurance?

Answer 28

A set maximum amount of life insurance for various size groups ## Footnote It is often used alongside multiples or increments of insurance based on the number of participating eligible lives.

Question 29

What are **multiples** in the context of life insurance?

Answer 29

Increments of insurance multiplied by the number of participating eligible lives ## Footnote Higher multiples are used for favorable plan designs, while lower multiples are for higher risk plans.

Question 30

In salary-based plans, how does the **average death benefit** relate to the maximum benefit amount?

Answer 30

The maximum benefit can become too risky if it is disproportionate to the average death benefit for the group ## Footnote Insurers may set factorial limits to manage this risk.

Question 31

True or false: A **maximum death benefit** can be allowed if it is ten times the average death benefit for a group.

Answer 31

FALSE ## Footnote Such a disproportionate amount can be deemed too risky and inconsistent with acceptable risk spread.

Question 32

What is an **aggregate-funded plan design**?

Answer 32

A plan where employees can allot any salary amount, pooling contributions for equal distribution over insured lives ## Footnote This design allows for liberal pricing and higher multiples due to reduced selectivity.

Question 33

What is the relationship between **individual financial contribution** and life insurance purchased in an aggregate-funded plan?

Answer 33

There is no correlation; all contributions are pooled together ## Footnote This structure spreads the risk equally among all insured lives.

Question 34

What must insurers factor in when pricing a **multilife plan**?

Answer 34

The spread of risk ## Footnote This consideration is crucial for determining acceptable coverage amounts and pricing strategies.

Question 35

Fill in the blank: A **salary-based plan** typically uses _______ to determine the maximum death benefit.

Answer 35

multiples ## Footnote This method helps establish limits based on the number of eligible lives.

Question 36

Who designates the **premium** in a pooled deferral plan?

Answer 36

The plan administrator ## Footnote The premium can be designated by equal life coverage or by spreading the pooled deferrals as equal premium.

Question 37

In a **tiered plan**, how does the amount of insurance vary?

Answer 37

By title or salary ## Footnote Tiered plans have flat amounts of coverage that increase in steps based on set criteria.

Question 38

What is an example of a **tiered plan** for death benefits?

Answer 38

* $250,000 for vice presidents * $500,000 for executive vice presidents * $1,000,000 for the president, COO, and chairman ## Footnote This structure shows how coverage increases based on title.

Question 39

What is a potential issue with **tiered plans** compared to salary-based plans?

Answer 39

Large percentage jumps in death benefit ## Footnote A single unhealthy employee can significantly impact the expected mortality and profitability of a smaller group.

Question 40

Fill in the blank: A **salary-based plan** increases death benefits gradually, while a **tiered plan** can result in very large increases in some years and likely none in others.

Answer 40

salary-based plan ## Footnote This gradual increase contrasts with the abrupt changes seen in tiered plans.

Question 41

What challenge do insurance carriers face with **tiered plans**?

Answer 41

Difficulties in estimating the fluctuating spread of risk ## Footnote This makes tiered plans more challenging to evaluate and price compared to aggregate-funded programs.

Question 42

True or false: In a **tiered plan**, the employee has ownership rights in the insurance.

Answer 42

FALSE ## Footnote Employees have no ownership rights, eliminating the prospect of individual selection.

Question 43

What is the **death benefit** for an employee earning $190,000 in a salary-based plan?

Answer 43

$380,000 ## Footnote This is calculated as twice the current salary.

Question 44

What would the **death benefit** increase to in the following year for an employee earning $205,000 in a salary-based plan?

Answer 44

$410,000 ## Footnote This represents an 8% increase from the previous year.

Question 45

What is the **death benefit** for an employee earning between $100,000 and $200,000 in a tiered plan?

Answer 45

$250,000 ## Footnote This amount is fixed for that salary band.