Survivor's Income Benefits

Abstract

Group life insurance plans once provided only modest amounts of coverage. Over tlle years, however, the levels of these plans have increased significantly, and it is not uncommon for an employee to receive from one and one-half to two times his annual earnings as a death benefit. For the most part, this growth came about largely as a result of competitive employment practices and not as a result of structured planning. There is a growing awareness that the typical earnings-related group life insurance plan is not totally effective in meeting an employer's objective of providing benefits for the surviving dependents of an employee. The purpose of this paper is to review the typical group life insurance plan, the features of various income plans in effect, and the funding and tax considerations of income plans. The majority of employers in the United States provide some form of death for the surviving dependents of an employee. Most commonly, this death is provided by means of group term life insurance (sometimes supplemented by accidental death insurance). An employee may also be entitled to death benefits under his employer's retirement or profit sharing plan. Death benefits are sometimes provided in other forms, such as supplemental cash payments or the use of so-called split dollar insurance plans. Generally speaking, these death benefits are paid in a lump sum to the beneficiary designated by the employee. Although the option to have the proceeds payable in installments is usually available, it is seldom elected. In recent years, there has been a growing interest in death plans. These plans are distinguishable Everett T. Allen, Jr., LL.B., is a member of the Massachusetts Bar and serves as Consultant with Towers, Perrin, Forster and Crosby, Inc. Previously he was Manager of Pension Plans Department for Provident Mutual Life Insurance Company. Mr. Allen is co-author of Pension Planning, published in 1966 by Richard D. Irwin, Inc. This paper was presented at the A.R.I.A. 1969 Annual Meeting. from the traditional employer-sponsored death plans in that a is payable only to certain specified dependents of the employee and only if these dependents survive the employee. Moreover, the is payable in installments and, as a rule, only for the period that the dependency status continues to exist. The purpose of this paper is to review the factors that have led to the growth of these survivor benefit plans, their general features, and the ways in which they can be funded. The tax implications of these benefits are also discussed. Before doing so, however, it is desirable to review the extent to which employer-provided death benefits are now provided in the United States. Employer-Provided Death Benefits The major portion of these death benefits consists of benefits payable under group life insurance policies. At the end of 1968, group life insurance coverage in force in the United States amounted to $438.2 billion, the amount of new group life insurance written during the year 1968, having amounted to $39.4 billion. This group insurance was provided through 73.0 million group life certificates issued under 274,000 master policies. Not