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Estimates of Commissions Payable to Insurance Agency

During First 10 Years of Plan

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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.

Investigations of agency compensation rates by New York Insurance Department

New York Insurance Department officials said the Department investigated rates of compensation payable by Executive Life and by Trans World Life on Plan policies in December 1972.

Executive Life

The master general agents agreement of Executive Life provides for a persistency bonus in addition to its regular scale of commissions pay able to general agents for renewal policies. The persistency bonus was to be a payment of 12.5 percent of the premimum for the second year of insurance, 17.5 percent for the third and fourth years, and 7.5 percent for the fifth through tenth years.

The Assistant Chief of the Life Bureau of the New York Insurance Department notified Executive Life on November 16, 1971, that the renewal commissions plus the persistency bonus were in excess of the section 213 maximum, that the company should be guided by that opinion, and that any payments made not in accordance with the opinion would constitute willful violations of the insurance law of the State of New York.

New York Insurance Department officials in December 1972 said they understood that Executive Life was not paying the persistency bonus.

Trans World Life

The New York Insurance Department was investigating whether the insurance agency qualifies for the agency development allowance paid by Trans World Life to supplement its commission scale. The allowance is 63.5 percent of the first-year commission which, in turn, is 55 percent of the first-year premium; therefore, the combined first-year commission and agency development allowance is almost 90 percent of the first-year premium.

New York law allows such an agency development allowance to supplement the maximum scale prescribed in section 213 in the case of new general agents who are establishing and developing an agency organization. A general agent with prior

service as a general agent or agency manager with any life insurance company or companies must have less than 5 years of total service to be considered a new general agent.

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The New York Insurance Department was also investigating why the regular commission scale of Trans World Life was used on Plan policies even though the guaranteed-issue principle was used for these policies. The general agent's contract with Trans World Life provides for paying a commission scale lower than the regular scale when policies are issued on the guaranteed-issue basis. Such policies are issued regardless of the applicant's state of health and therefore are subject to a higher rate of mortality than regularly underwritten policies. One way the companies have to offset this extra mortality is to pay the agent a lower amount of commission for guaranteed-issue policies.

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PLAN WAS NAMED AS BENEFICIARY OF INSURANCE POLICIES

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The insurance policies purchased from both Trans World Life and Executive Life on the life of each member were issued to Plan trustees, and named the Plan as the beneficiary and owner. The trustees therefore received the proceeds from the insurance upon a member's death. Furthermore, the trustees required that, if a member terminated for reasons other than death and chose to own the policy, he would have to purchase the policy from the trustees for the cash value.

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Executive Life Policies were issued on the basis of an application for each policy signed by an agent of the trust

The policies were issued without a consent agreement or an application signed by the insured persons.

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The New York Insurance Department questioned the legality of this procedure. The Department cited Executive Life on February 9, 1972, for violating section 146(3) of New York Insurance Law because the applications did not contain the signed consent of the insured. New York Insurance Department officials advised us in December 1972 that hearings had been held on this citation but that the Department had made no decision.

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DISCOUNTING PRACTICE

The administrator discounted the proceeds on life insurance policies when a member's beneficiary elected to receive a lump-s um payment rather than installment payments, and the trustees accepted this practice. The rules and regulations did not specifically authorize this practice. Furthermore, insurance notices issued to members did not state that the face amount of insurance would be paid in installments over a period of years or that the amount payable to the member's beneficiary at death would be the discounted value of such installments.

A list of death-claim payments made by the Plan from its inception through March 31, 1972, shows that each beneficiary elected to receive a lump-sum payment and that the payments were discounted.

The discount was computed on the basis of interest at the rate of 6 percent per year, compounded annually, with the first payment becoming due 1 year after death and with annual payments thereafter. This rate reduced the face amounts of insurance payable by 26.4 percent if death occurred on or before age 55 and by 15.8 percent if death occurred after age 55.

In monetary terms, for each $1,000 of death benefits the life insurance company paid to the Plan when a member died on or before age 55, the member's beneficiary was paid $736 and the Plan retained $264. If death occurred after age 55, $ 842 was paid to the member's beneficiary and $158 was retained by the Plan.

The booklet titled, "Your Severance Bonus Plan," which was intended to advise members of the benefits to which they were entitled, did not disclose that insurance proceeds were supposed to be paid in installments and that part of the proceeds would be retained by the Plan if a single-sum payment was made. The booklet states that certificates would be issued to members telling them what their insurance benefits would be in each case. As indicated above, however, the amount shown on the insurance certificate was the face amount of the insurance which was paid to the Plan rather than the amount payable to the member's beneficiary when a single-sum payment was elected.

The trustees of an employee welfare fund are responsible in a fiduciary capacity for all money, property, or other assets which they receive, manage, disburse, or direct according to section 37-L of the New York Insurance Law. We question how effectively the trustees have carried out their fiduciary responsibilities.

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