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Furthermore, the policies had little or no cash value during the early years, depending on the member's age at issue. For example, the policies for an inception member, aged 24, who terminates 3 years later, would have no cash value even though the Plan would have expended about $2,000 in premiums for the policies.

The net result is that, as far as the plan and its members are concerned, the ordinary whole-life policies purchased by the Plan had the disadvantage of higher cost but not the advantages which usually accrue to these policies.

Comparison of commission rates of individual and group policies

The Plan's use of ordinary level-premium life insurance policies provided the basis for the payment by the insurance companies of much higher agents' commissions than would have been paid if group life insurance had been used.

We estimate that, during the Plan's first 2 years, compensation payable to the insurance agents on the ordinary life insurance policies purchased by the Plan was about $800,000. In comparison, we estimate that commissions would have been only about $10,000 if the same amount of insurance had been provided under a group term policy and the commissions had been based on the high scale of the range of the National Association of Insurance Commissioners' (NAIC) Code of Ethical Practices with Respect to the Insuring of the Benefits of Union or Union-Management Welfare and Pension Funds (the Code of Ethical Practices).

NAIC adopted the Code of Ethical Practices in December 1957. It was intended to complement State insurance laws and to be a declaration of applicable principles in the proper conduct of insuring benefits of welfare and pension funds. The code includes a range of insurance commission rates which are considered reasonable for specified volumes of premiums.

As shown in the table below, the rates of commissions payable to agents on individual policies by Executive Life and Trans World Life are substantially greater than the high scale of the acceptable range adopted for group insurance commissions by the NAIC in its Code of Ethical Practices.

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The rates are also significantly higher than the rates of
Trans World Life for group policies.

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The rates shown include commissions and other compensa tion for both agents and general agents. Because the commission scale in the Code of Ethical Practices provides only for agents' commission, we increased the commission rate by 25 percent, an estimate of the compensation usually received by general agents. The Trans World Life rate for the first year for individual policies includes an agency development allowance of 34.9 percent of the first year's premium.

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On the basis of a similar comparsion, the Welfare Bureau of the New York Insurance Department criticized the commissions payable on the insurance purchased by the Plan as being unconscionable.

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The Code of Ethical Practices commission scale covers the the sale of group contracts, the form of coverage commonly used by union-management welfare and pension funds. Although Executive Life resisted the applicability of the commission scale of the Code of Ethical Practices to individual policies purchased by the Plan, the New York State Insurance Department officials believed that individual policy commission rates were not applicable to a pension or welfare plan which involved the sale of several thousands of policies through an agreement with a group of trustees and that group commission rates should have applied. As of December 1972, this matter was still being disputed.

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To illustrate the relative levels of agency compensation on the sale of individual policies versus group term polices, we estimated the commissions which would have been payable during a 10-year period on two blocks of insurance purchased during the first 2 years of the Plan. A block of insurance, for this illustration, is the insurance purchased in either of the first 2 years of the Plan plus replacements after issue sufficient to maintain a constant total amount of insurance in force. In other words, for each termination or death there is a corresponding new entrant.

We considered the first year of each block to be newly issued in calculating group commissions. Estimates were developed as though each of the particular companies involved were actually providing the entire insurance coverage for the Plan.

We estimated the commissions payable based on two assumptions regarding member turnover.

-- There would be no terminations. This assumption

is unrealistic but illustrates, simply, the dif-
ferences in the amount of commissions payable on
individual and group insurance.

--Ten percent of the members would terminate each

year and be replaced by new members.

The premium level used in the first illustration of the table (two blocks of $510,000) is approximately the amount of premiums which the plan paid on the individual policies purchased during the 2 years. The lower premium level is an estimate of what the premiums on the same amount of insurance coverage would have been during the first policy year if a group term insurance policy had been purchased. Our estimate of $125,000 is based on the statutory minimum firstyear premium for companies doing business in New York State. The minimum, prescribed by law, is designed to sufficiently cover most groups.

Estimates of Commissions Payable to Insurance Agency

During First 10 Years of plan

$21. lices, bie based 300,

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The above table shows the difference between insurance commissions payable on group and individual policies generally. It should be noted that group insurance commissions are not affected by member turnover.

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To illustrate the relative levels of agency compensation on the sale of individual policies versus group term polices, we estimated the commissions which would have been payable during a 10-year period on two blocks of insurance purchased during the first 2 years of the Plan. A block of insurance, for this illustration, is the insurance purchased in either of the first 2 years of the Plan plus replacements after issue sufficient to maintain a constant total amount of insurance in force. In other words, for each termination or death there is a corresponding new entrant.

We considered the first year of each block to be newly issued in calculating group commissions. Estimates were developed as though each of the particular companies involved were actually providing the entire insurance coverage for the Plan.

We estimated the commissions payable based on two assumptions regarding member turnover.

-- There would be no terminations. This assumption

is unrealistic but illustrates, simply, the dif-
ferences in the amount of commissions payable on
individual and group insurance.

--Ten percent of the members would terminate each

year and be replaced by new members.

The premium level used in the first illustration of the table (two blocks of $510,000) is approximately the amount of premiums which the plan paid on the individual policies purchased during the 2 years. The lower premium level is an estimate of what the premiums on the same amount of insurance coverage would have been during the first policy year if a group term insurance policy had been purchased.

Our estimate of $125,000 is based on the statutory minimum firstyear premium for companies doing business in New York State. The minimum, prescribed by law, is designed to sufficiently cover most groups.

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