The formula for determining the face amount of insurance for a policy is as follows: Subtract the Member's age at issue date of the policy from 65 and multiply the result by 50 times the weekly contribution made by the employer on behalf of the Member.

The insurance company issuing the individual policies considers that these policies are in a special classification justifying special premium rates. In order to provide the amounts of insurance determined by the Plan formula for a premium allowance of 49.98% of the employer payments to the Plan, the rates in the premium schedule per $1000 of insurance are arbitrarily reduced at issue ages near age 40 years.

Mr. Ostrer stated that the premium rates charged to the plan are approximately 30% below the rates usually charged for individual ordinary policies. The insurance company pays a commission for each policy issued. The life insurance agent is designated by Mr. Ostrer who is the originator of the severance plan. Mr. Ostrer had designated Dina Gelman as both general and soliciting agent. Dina Gelman is Mr. Ostrer's sister. The officers of Fringe Programs, Inc. the severance plan's administrator are Dina Gelman and Jules November, an attorney. We are advised that Dina Gelman is the sole stockholder in Fringe Programs, Inc.

The first year's commission rate is 50% of the premium. There is no addition for an override commission to a general agent, and no expense reimbursement allowance is involved. The agent also receives renewal commissions for nine years and a persistency bonus for the second through tenth years. The rates for these commissions and bonuses which were not specified by Mr. Ostrer are as follows: [In percent]

Note: The payment of persistency bonuses does not appear to be legal under the New York statute.

The Severance Plan owns the insurance policies and is the beneficiary for each of the policies. In the event of a death, the insurance company pays the face of the policy to the Plan. The Plan pays out either (1) the face in ten equal annual installments each equivalent to 1/10th of the original face amount paid to the Plan or (2) the single sum discounted value of those payments, if requested by the beneficiary.

Since the present value of the 10 installments whether paid out over the 10 year period or discounted and paid in one sum is less than the face amount of the policy, the Fund retains part of each insurance claim payment as a gain.

Mr. Ostrer gave out copies of premium and cash value tables for group (term and ordinary) insurance as issued by the Manhattan Life Insurance Company. He explained later that the Manhattan had other premium rates and values for insurance to be issued for severance benefit plans. He did not have these special values for a severance plan available in his office.

Life Insurance Company

The life insurance companies issuing the special classifications of individual life insurance policies for use in severance benefit plans are (except for the Manhattan Life of New York) new small companies interested in current volume production. These companies are willing to accept probable losses from poor experience in the future in order to secure a larger total for current amounts of insurance issued and in force. The large and well established old line companies will not consider any part of the life insurance of the severance benefit plans.

The life insurance company for the Plan of Local 295 is the Executive Life Insurance Company of New York in business since 1957 and formerly known as the Citizens Life Insurance Company.

The extra costs to the insurance company of the special classification of policies include (1) the additional death claims from guaranteed issue, (2) the extra death claim costs resulting from anti-selection in the continuance of policies at the time of severance, (3) losses on early lapses before initial expenses are amortized, (4) higher agency renewal compensation, and (5) lack of company experience on which

to base premium rates. Possible areas of savings for these policies include (1) lower costs for first year commissions and expense allowances than for regular individual policies, and (2) lower issue expenses because of elimination of underwriting. The expense gains of the first year will be available at once and the mortality losses of the later years will be deferred to those later years. This appeals to new companies seeking immediate increases in amounts of insurance.

Severance Payments

Upon severance from the Plan after completion of 5 years of Membership, a terminating Member is granted a severance allowance equal to the total employers' payments on behalf of such Member plus interest as allowed annually by the Trustees. The terminating Member can also have the insurance policy (or policies) issued on his life but the cash value of the policy (or policies) is deducted from the withdrawal allowance. If the terminating Member became a Member as of the effective date of the Plan, these provisions apply in the event his termination is at any time including termination in the first 5 years. If the terminating Member became a Member after the effective date of the Plan and his termination date is before the end of 5 years of continuous Membership, there is a forfeiture of part of the accumulated sum otherwise payable. The percentages of value forfeited are as follows:

End of year of membership:

1

2

3

4

Forfeiture percentages

Forfeiture

percentage

80

60

40

20

5 and over.

0

This severance allowance is the amount paid if severance from the Plan is for any reason other than death. If the severance from the Plan is because of the death of the Member while actively employed, this severance allowance is changed as follows:

(1) The total premiums paid for the life insurance policy (without interest) is deducted from the total accumulated payments.

(2) Death benefits are paid to the Member's beneficiary as explained in the topic on life insurance.

COMMENT ON CASE

The Severance Benefit Plan is essentially a combination of deferred compensation and life insurance for the Members of the Union included in the Plan. The Plan provides specific payments to a terminating Member upon his severance from the Plan. No definition of severance is available but apparently termination of employment because of death, retirement, disability or lay-off with an employer making the required payments to the Plan constitutes severance. Mr. Ostrer did not explain what happens when a temporary lay-off occurs because of sickness, lack of work, or leave of absence, but he furnished booklets for two Severance Plans other than the Severance Benefit Plan of Local 295. These booklets explain that the insurance for those Plans will continue for 60 days after commencement of lay-off and that the 30 days grace period on the policy will extend the insurance for another 30 days. There is no explanation of how the Plan pays the premium for the 60 days or of who is responsible for the premium for the additional 30 days. The booklet of the Airline, Aerospace, and Affiliated Employees Severance Fund contains a provision in regard to reinstatement reading as follows:

"In the event a severed employee returns to work he starts anew as a new entrant into the Plan, unless he desires to reenter the plan on a retroactive basis, by returning the total monies withdrawn as severance to his account."

This provision makes no mention of the life insurance policy. Presumably this policy could be reinstated by the return of the cash value and the payment of past due premiums (with interest on the cash value and on the past due premiums) but there is no indication of who will pay the over due premiums and the interest. Any temporary termination of contributions by an employer on behalf of a Member could cause substantial problems, especially for the continuance of large premium payments for individual cash value policies.

The severance benefit is provided for a Member who continues in the Plan to his retirement from employment because of age. This is apparently the basis for the IRS classification of a Severance Plan as a pension plan. Since that benefit to

a living Member is a lump sum payment, the classification as a pension plan appears questionable. Pension plans normally provide life annuities after retirement.

The Plan provides additional benefits if severance is caused by death. This provides the justification for buying life insurance.

Funding Method

The employers make the required payments to the Plan and these payments are used for expenses and for funding the benefits of the Plan. The funding method is like that frequently used for small pension plans-a combination of individual level premium life insurance policies and a supplementary fund.

This funding method is the most expensive method of funding a pension plan because of the much larger commissions paid to insurance agents and because of the larger expenses for the individual policies. This method is not used for large pension plans. Instead, the pension benefits of a large pension plan are provided by a group pension plan and the life insurance benefits by a group term life insurance policy. The expense and commission charges for this group procedure are considerably lower than for the individual policy procedure. Furthermore, the group method is more flexible and less subject to funding difficulties if a Member does not work full time during a year because of illness, temporary lay-offs, leave of absence or for any other reason.

If the Severance Plan is to proceed successfully, continuous full employment is essential. In buying individual level premium whole life policies, a fixed commitment is made to pay substantial premiums in the future. These premiums must be paid for each policy if it is to continue in force regardless of whether or not the Member insured continues to work full time.

If an eligible Member has a temporary period of unemployment that terminates his eligibility for the Plan, he receives the Severance Benefits. These benefits will include either the insurance policy on his life or the cash value of that policy. When he returns to work he will be eligible for benefits as a new participant. He will again apply for a new policy unless he returns the cash value of the old policy and pays the overdue premiums all with interest. The Member and the Plan will lose when a new policy is secured. Probably a new policy will be purchased because of inability or of refusal to pay back the money required. The new policy increases costs because the first year costs (including first year commissions to the agent) will again be incurred. The only party that gains from the new policy transaction is the agent who again is paid 50% of a first year premium.

If this Member who loses eligibility and who again becomes eligible kept his old policy when he was terminated and applies for a new policy when he again becomes eligible, he apparently could be insured under two policies. This could produce considerable anti-selection against the insurance company by substandard risks with interrupted periods of continuous employment.

Under a group term policy, the insurance can be terminated during a period of unemployment and then reinstated with only insignificant expenses. Under a group term policy, there are no cash values and first year Commissions are paid only on premiums of the first group policy year. Renewal commissions only (for 9 years) are paid on group premiums collected after the first policy year regardless of whether the participants insured are renewal participants or new participants. The argument that whole life insurance is better than term insurance simply does not apply to the Severance Plan or to any pension plan. The compulsion for savings for the Severance Plan is that the individual Member must accept a reduction in wages to cover the employer payments on his behalf to the Severance Plan. The question of whether all of the savings in excess of true insurance costs should be accumulated in the separate asset fund or partly in that fund and partly in cash value insurance policies is a decision made entirely by the Trustees of the Plan. The individual Member has nothing to say. His $40 per week goes into the Severance Plan regardless of whether cash value insurance or one year term insurance is purchased to provide the additional death benefits (face amount less reserve) provided by the insurance contracts.

In comparing level premium whole life insurance with one year term insurance, consideration must be given to the fact that the amount of pure insurance for the whole life policy is not the face amount of the policy but is the face amount less the reserve (the net amount at risk). For the same net amounts at risk, the incurred claim payments for individual level premium whole life insurance and for group one year renewable term insurance will be the same for the same group of persons insured. The commissions and expenses for the whole life insurance will be greater for the individual whole life policies. Obviously, the individual

policy procedures, involving the paying of some of the funds to be saved to an insurance company, is the more expensive method of funding. This can be established by an actuarial analysis using reasonable assumptions for the mortality rates, lapse rates and expense rates to be expected for the group.

One of the arguments for funding a small pension plan by use of individual policies is that the individual policy contains settlement options that guarantee the cost of a unit of pension benefit at retirement. This argument does not apply to the Severance Benefit Plan because this Plan does not provide for annuities to the Members. The benefits payable to a Member at Severance for any cause other than death is a lump sum payment payable 90 days after discontinuance of eligible employment. Classification of the Severance Plan as a pension plan seems peculiar under these conditions.

When whole life insurance is used for funding, there are additional expenses involved that are not incurred if group term insurance is used. The State premium taxes are higher for the whole life insurance premiums than for the term insurance premiums because, in effect, premium taxes are paid on that portion of the savings that is included in each whole life policy premium. When whole life insurance is used, the individual insured must include in his taxable income, the one year term premium for the amount at risk for his level premium policy. This is not required for group term insurance.

An insurance company is subject to Federal income taxes, but the trust fund of an IRS approved pension plan is not subject to these taxes.

Administrative expenses are higher for separate whole life policies than for group term insurance. Wholesale and mass handling procedures have been developed for group insurance that result in less expense charges than are incurred for individual policies providing corresponding death benefits.

Commissions

The higher cost of whole life insurance is illustrated by the first year commission rate of 50%. In comparison under group insurance for a case as large as the Severance Plan, the agent's first policy year commission rate would be about 3.5%. The whole life first year commissions are more than 14 times the group first year commissions.

Commissions for years after the first year would also be higher for the whole life plan than for a group plan. For a group policy with the same premium volume as the Severance Plan, the agents renewal commission rate would be less than 2%. The indicated ratio of the commissions for group term insurance is again more than 14 times.

Assuming no new issues and no terminations, the commissions and bonuses for the first three years will equal one year's premium for the whole insurance, according to Mr. Östrer.

If the total premium for one year remains the same, the group commissions for Plan years after the first will remain the same regardless of the turn over for the individuals insured. For the whole life insurance, this will not be true. When terminating Members with whole life insurance are replaced by new Members with whole life insurance, first year commissions rather than renewal commissions are paid on the premiums of the new Members. The total premiums for all insurance can remain the same, but the higher the turnover rate the greater will be the total commissions paid to the agent for the renewal Years of the Plan.

With total life insurance premiums of $500,000 in the first year, $1,000,000 in the second year, and $1,300,000 in the third year, the Commissions to the agent for the individual whole life insurance policies of Local 295 Severance Benefit Plan will probably equal at least $1,000,000 during the first three years of the Plan. In contrast, the commissions and allowances payable on the same premium volume under group term coverage should not exceed $75,250 in accordance with the Code of Ethical Practices of the National Association of Insurance Commissioners, calculated as follows:

The above table is based on the assumption that the same amount of premiums will be paid for group life insurance as for individual insurance. However the amount of life insurance probably will not be increased so that the premiums for group life insurance coverage are likely to be materially less than the premiums for individual life insurance policies. The reductions in agency commissions would therefore be even greater than that indicated by this table if group life insurance were used instead of individual life insurance.

In addition Fringe Programs, Inc., will collect administration fees for which no limits have been established. In this connection Mr. Ostrer was asked to explain how Fringe Programs, Inc. continues to operate without the receipt of fees. He stated that the insurance companies made cash advances against commissions to the insurance agent Dina Gelman. The agent in turn advanced cash to Fringe Programs. Executive Life Insurance Company made cash advances of $200,000 to Dina Gelman. Other insurance companies advanced an additional $215,000 to Dina Gelman who is also the insurance agent for other severance funds. Amounts of Insurance

The amounts of insurance that will be purchased by approximately half of the payments of $40 per week for 50 weeks in a year are large. The amounts vary from about $95,000 at age 20 at issue to about $30,000 for age 50 for a weekly contribution of $40. These are large sums to be issued on the lives of members of the Teamsters local without regard to the individual needs of each Member for insurance. A married man age 45 with two minor children obviously needs more (not less) insurance than a single man age 25. The amounts of insurance for the Severance Plan are higher because of the apparent desire to pay the maximum amount possible as life insurance premiums on which the agent will collect commissions. The individual Member would have better results if a considerably smaller amount of group term insurance was secured with the same amounts for all Members. The amounts could be $10,000 until attained age 60 and then decreasing thereafter by attained age. The Severance Plan could permit any Member to use part of the amount otherwise accumulated for him to buy individual insurance on a wholesale payment basis. The Severance Benefit accumulation for a Member would not then be used for more expensive whole life insurance without his consent.

Severance Benefits

Mr. Ostrer's explanation of the benefits paid on severance does not agree with the description of "Benefits under the Plan" as included in the booklets distributed by Mr. Ostrer for two other plans:

The following is quoted from these booklets:

"Up to one half of the contribution on behalf of the employee is used to procure insurance which develops cash surrender value in addition to affording the employee an immediate death benefit. The remainder of the contribution is credited to the employees account.

"Upon severance, depending upon length of service, the employee is entitled to take out what has been credited to his account by virtue of the contributions and credited earnings. In addition, he can elect to either take the insurance policy or the cash surrender value of the policy, as is set forth in the rules and regulations of the Severance Trust which governs such take over."

This quotation provides that half of each contribution on behalf of a Member is used to purchase insurance and the other half is deposited to his account. Upon severance, the Member is entitled to take out the parts of the contributions that have been credited to his account plus credited earnings. In addition, he can take the insurance policy or the cash value of the policy.

Obviously the total severance payment under the provisions in this booklet will be considerably less than the amount indicated by Mr. Ostrer. He stated that the terminating Member would receive the return of the entire amount of the contributions made on his behalf plus dividends. He also stated that the Plan would receive the cash value of the insurance policy but that the terminating Member could have the policy if he agreed to the deduction of its cash value from the accumulated total contributions.

In order to determine exactly the benefits, provisions and limitations of Local 295 Severance Benefit Plan, a verified copy of the Plan and Trust Agreement filed with IRS and the Labor Department must be studied

Financial Analysis

In order to determine the financial results for the Plan, a detailed actuarial and accounting analysis and projection must be made for its financial operations.