Sorry h-burger, the company borrows against the value of the insurance and then uses some of that money to pay the premiums. Any pay-outs are tax-free!
If the company's State doesn't allow them to take out this 'secret' insurance (advise and consent laws) they just fly into a state that doesn't have them and sign the papers over lunch before they fly back home......
from whom would they borrow the money - the insurance company ? regardless of where they borrow the money, the "borrower" (owner of the policy) would now have to pay interest on their "own" money borrowed against the policy (the lender wants to make some money also - whether the life insurance co or another lender).
also keep in mind that group life insurance is usually term life without cash-value; any policy providing "cash/loan values" has a higher premium so one would be defeating the purpose of an inexpensive life policy.
there are individual term life insurance policies with "cash/loan values" but they are always more expensive than than straight term insurance. they also usually wind up with zero cash value at the time of expiry, but you'd still have to pay interest on any money borrowed against it while in force.
leet's use a hypothetical example :
$100,000 policy with an annual premium of $2,000; cash/loan value after 20 years $30,000,
a loan of $30,000 is taken out at that time
-your policy value is now reduced to $70,000
-you still have to pay an annual premium of $2,000 to keep the policy in force (at $70,000)
-you have to pay interest on the $30,000 borrowed against the policy(i don't know the current rate, but let's assume 6% , that's another $1,800 per year to keep the $70,000 policy alive)
-if the interest is not paid, the policy will likely lapse soon and the policyholder winds up with ZERO -there has of course been protection provided up to that point.
as i said earlier, i've been out of the business for 20 years and some things may have changed, but i don't think actuarial calculations have changed much. hbg
If there is one little thing I know about the actuarial business is that it deals in definites.
If you have 100 employees and do that math, then $3,800 x 100 is $380,000 - right? What are the odds that AT LEAST 4 of them are going to die during that year? Hell, if you are in an industry that employees people that are in the 18-25 year-old bracket or 40-55 year-olds - all working in a low-paid, no-career, high-volume-high-stress, dead-end job - I'd say that you are going to see a lot more than 4 clock out permanently.
And you ain't paying them $100,000 a year either....
dear mr. stillwater, you said : " And you ain't paying them $100,000 a year either.... ".
it doesn't matter what the employees are earning, the insurance company is going to collect the premium based upon the amount of insurance for the employees. let's use an example : if a company has 100 emplouees and insures each one for $10,000 - or whatever the amount might be -, the insurance company will collect a premium based upon 100 times $10,000 = $1,000,000(the sum insured). the insurance company will usually also want to know if these employees represent "an average risk"; if they represent an "above average risk"(such as a larger number of seniors in the workforce), then the insurance company will add a "risk factor" to the multiplier (this might also apply to businesses with a higher rate of death, such as mining).
quite simply, an insurance company cannot afford to pay out more than they take in - or they'll be bankrupt; which would not be in the interest of the insured company either, because they wouldn't be able to collect any benefits.
state and federal(in canada) insurance departments also require the insurance companies to keep adequate reserves to be able to pay future claims - that's why insurance companies are usually flush with money and are also some of the major investors in both the united states and canada.
i'm sure you realize that i'm not an actuary, so i'm not an expert in the actuarial calculations that go into the rate building process.
this certainly is an interesting subject to discuss. almost feel like i'm back at work - perish the thought ! hbg
These discussions are only considering the underwriting profit or loss for the insurance companies. Underwriting losses are quite common and are not a problem if they are exceeded by investment profits.
flyboy writes : "Underwriting losses are quite common ".
you are quite right, flyboy. particularly in the non-life insurance business where you can adjust premiums quickly. since life insurance - even group term life insurance - usually has fairly stable premiums and also because you are talking about death benefit payments that may have to be made many years later, life insurance companies like to have a stable base rate(and stable investment base). when large sums of insurance come into play , re-insurance would be another factor to be considered.
should we call in a consulting actuary ? hbg
ps. a number of insurance companies have been stung by placing too much reliance on being able to make up underwriting losses through investment gains, and have had to be bailed out or taken over.
Indeed, and we saw rate increases after 9/11 to make up for investment loses.
..this certainly is an interesting subject to discuss. almost feel like i'm back at work - perish the thought ! hbg
My apologies :wink: I'll cease the actuarial babble if you agree not to ask for anything based assigning a Dewey Decimal Classification number to a topic with appropriate Library of Congress Subject Headings....
dear mr. stillwater : i fully agree to the terms set out by you. signed and sealed. hbh