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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

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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. Ostrer.

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:

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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.

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Such an analysis will include a determination of whether or not the assets of the
Plan will be sufficient to cover its liabilities if the Plan continues to function
indefinitely and if the plan is terminated, Without such a study statements
regarding the financing of the Severance Benefit Plan are generalizations that are
not supported by facts.
The Plan as Beneficiary

The naming of the Plan as beneficiary for the life insurance can be questioned since the Plan retains part of the death benefits. The legality of this Procedure could be questioned on the grounds that the Plan has no insurable interest in the lives of the Members in excess of its obligation to pay death benefits to beneficiaries.

Over a reasonable period of time, the accumulated value of premiums paid for life insurance for a large group of persons will exceed the accumulated value of the death claims and the cash values of the remaining policies because of the expenses and profits of the insurance business. The situation is comparable to betting on all of the horses in a horse race. The purchase by the Plan of excess insurance for expected gain of the Plan cannot be justified on the basis of reasonable principles of insurance and of probability. The principal purpose of buying life insurance to provide the death benefits payable to the beneficiaries to avoid random fluctuations in total death benefit payments in one year that the Plan would have to absorb if the death benefits were self insured. The gains for the mass purchase of insurance on a large number of lives with benefits payable to one organization are by the insurance agents and maybe the insurance companies.

PROBLEMS FOR STUDY AND ACTION

Study of and possible action on the following problems involving the Severance
Plan is recommended:

1. The payments by insurance companies of large advances against first year commissions.

2. The payment of persistency bonuses in place of expense reimbursement allowances. The payment of persistency bonuses does not appear to be legal under the New York statute.

3. Agent's commissions, general agents' override commissions, expense allowances and bonuses provided by agency contracts and actual paid.

4. Determination if the life insurance policies are self-supporting on the basis of reasonable assumptions for the future experience for the separate classification of insurance.

5. Study of the legality of Naming the Plan as a Beneficiary either for all of the insurance or for that part of the insurance in excess of the liability of the Plan to the beneficiaries.

6. The fiduciary responsibility of the Trustees to invest and to spend the employer payments on behalf of the employees to the best advantage of these employees.

7. The administration expense charges to the Plan for expenses of the Trustees and for payments to Fringe Programs, Inc.

8. Audit of the Income, disbursements and assets of the Plan and the determination of the present value of liabilities.

9. The sufficiency of Gross Premiums for the insurance policies as compared with the net premiums used to calculate legal reserves for the insurance.

The views expressed in this memorandum represent the consensus of opinion of those signing below and do not necessarily represent the views of the agencies by which they are employed. The names of these agencies are listed under the signatures for purposes of identification only.

LAWRENCE M. HYMAN,

Supervising Examiner,
State of New York Insurance Department.
GEORGE PERLA,

Senior Examiner,
State of New York Insurance Department.

HERBERT L. FEAY,
Assistant Director and Actuary,

U.S. General Accounting Office.

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APPENDIX VII
STATE OF NEW YORK INSURANCE DEPARTMENT,

New York, N.Y., October 4, 1967.
In the Matter of the Applications and/or Licenses of
Louis C. OSTRER, SAMUEL SCHEINHAUS, AND SEYMOUR GREENFIELD,

RESPONDENTS

FINDINGS OF FACT CONCLUSIONS AND DECISION The above entitled matter having come on for hearing on September 20, 1967 at the office of the Superintendent of Insurance, 123 William Street, New York, New York to show cause why all licenses issued to respondents should not be suspended or revoked, and why all pending applications for licenses should not be denied, on the grounds that respondents have demonstrated their untrustworthiness to act as insurance agents and brokers within the provisions of Sections 117 and 119 of the Insurance Law, and have violated Section 125 of the Insurance Law and Departmental Regulation No. 29; said proceedings having been commenced by the service of citation upon respondents in accordance with Sections 22, 23, 117 and 119 of the Insurance Law; Louis C. Ostrer having appeared by Norick & Pollina, Esqs., Michael C. Pollina of counsel; respondent Samuel Scheinhaus having appeared pro se; respondent Seymour Greenfield having appeared by David E. Flatow, Esq.; the Insurance Department having appeared by Robert Cohen, Esq.; and after having heard the proof presented by the parties herein and the matter having been fully submitted and due deliberations having been had, the following findings of fact, conclusions and decision are made:

FINDINGS OF FACT

1. The citiation in the above entitled proceeding issued by the Department was served upon respondents in accordance with the provisions of Sections 22, 23, 117 and 119 of the Insurance Law on August 23, 1967. 2. Respondents are presently licensed as follows:

(a) Louis C. Ostrer is licensed individually as an insurance agent pursuant to Section 113 of the Insurance Law, and as sublicensee of SMB Agency, Inc. and of The Homer Agency, Inc., both corporate agents pursuant to Section 113 of the Insurance Law.

(b) Samuel Scheinhaus is licensed individually as an insurance agent pursuant to Section 113 of the Insurance Law, and as sublicensee of SRS Planned Estates, Inc., a corporate insurance agent pursuant to Section 113 of the Insurance Law.

(c) Seymour Greenfield is licensed individually as an insurance agent and insurance broker pursuant to Sections 113 and 119 of the Insurance Law, respectively, and as sublicensee of Lincoln Affiliates Inc., of Viscount Agency, Inc. and of The Homer Agency Inc., corporate insurance agents, all pursuant to Section 113 of the Insurance Law, and as sublicensee of Sportsmen Brokerage Inc., a corporate insurance broker pursuant to Section 119 of the

Insurance Law. 3. The Allmetal Screw Products Co., Inc. (hereinafter referred to as "Allmetal") a New York corporation having its home office in Garden City, New York, held life, insurance policies on the lives of its key executives, including Sylvan Haenel and Nat Epstein, among others, issued by the Canada Life Assurance Company (hereinafter referred to as the "company''). The company extended to holders of life insurance policies the privilege of depositing funds with said company, which deposit would be used for the payment of future premiums, to be allocated when same became due. Allmetal elected to deposit money with the aforementioned company to be used for the payment of future premiums on the policies held by Allmetal. The amounts so deposited were to be applied in payment of premiums through the year 1973. A portion of the funds so advanced for deposit by Allmetal was borrowed from the Long Island Trust Company, in return for which said policies were assigned to the bank as security. During March 1964 Allmetal issued checks totalling the sum of $379,341.86 made payable to the company representing deposits for future premiums on the Sylvan Haenel and Nat Epstein policies.

Said checks were delivered to respondent Louis C. Ostrer who was a sublicensee of Louis C. Ostrer Associates, Inc., at that time corporate agent of the company. In pursuance of a plan or scheme to improperly divert and/or misappropriate funds, said respondent, without authorization, altered the aforesaid checks by inserting

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