Employer-Sponsored Disability Insurance and Life Insurance

By Martocchio, J.J.

Edited by Paul Ducham

HISTORY OF DISABILITY INSURANCE

Instances of company-sponsored and individual disability insurance appeared in the 1800s as the United States shifted from an agrarian economy to an industrialized economy. The agrarian economy was largely based on self-employment and the employment of family members. The industrialized economy, in contrast, mainly entailed ownership of manufacturing facilities that employed scores of workers. Many workers became seriously ill or injured while performing their jobs due to the absence of health and safety regulations. The Occupational Safety and Health Act (osha) was passed in the early 1970s. In the 1800s and early 1900s, the seriously injured and ill workers were left with virtually no recourse because social insurance programs to protect injured and ill workers were nonexistent. After the introduction of social insurance programs (including workers’ compensation and Social Security in the 1910s and 1930s, respectively), private disability insurance was still necessary because the government programs were not designed to provide complete income replacement as the result of illness or injury.

Prior to the 1960s, there were three forms of relatively primitive employer- sponsored insurance that emerged. First, employers created establishment funds to provide minimal cash payments to workers who became occupationally ill or injured. Second, insurance companies sold individual disability insurance policies to workers. Third, greater awareness following state workers’ compensation laws in the early 20th century led employers to purchase group disability insurance policies. The initial forms of disability insurance were primitive because they paid lump sum benefits following the occurrence of disability, and the amounts were generally the same regardless of age or the severity of illness or injury. This approach left the youngest and more seriously disabled workers with insufficient funds to help cover their lost income over longer periods of time than the oldest and least seriously ill or injured disabled workers.

During the 1960s, insurance companies began to manage liability more effectively, by offering benefits on an income replacement basis to avoid the previously noted shortcomings of earlier disability insurance approaches.

SHORT-TERM DISABILITY INSURANCE

Short-term disability plans classify short-term disability as an inability to perform the duties of one’s regular job. Manifestations of short-term disability include the following temporary (short-term) conditions:

  • Recovery from injuries.
  • Recovery from surgery.
  • Treatment of an illness requiring any hospitalization.
  • Pregnancy—the Pregnancy Discrimination Act of 1978 mandates that employers treat pregnancy and childbirth the same way they treat other causes of disability.

Most short-term disability plans pay employees 50 to 66.67 percent of their pre- tax salary on a monthly or weekly basis; some pay as much as 100 percent. Short- term disability plans pay benefits for a limited period, usually no more than six months (26 weeks). Many companies set a monthly maximum benefit amount, which could be less for highly paid employees. For example, a company pays employees 66.67 percent, subject to a monthly maximum benefit totaling $5,000. Let’s assume an employee’s annual income equals $130,000 ($10,833 per month). Without the cap, he or she would earn $7,225 a month (0.667 $10,833). The cap results in a monthly loss of income totaling $2,225 ($7,225 – $5,000).

   Three additional features of short-term disability plans include:

  • Preexisting condition clause.
  • Waiting periods: Preeligibility period and elimination period.
  • Exclusion provision for designated health conditions.

Similar to health insurance plans, a preexisting condition is a mental or physical disability for which medical advice, diagnosis, care, or treatment was received during a designated period preceding the beginning of disability insurance coverage. The designated period usually is any time prior to employment and enrollment in a company’s disability insurance plan. Insurance companies impose exclusions for preexisting conditions to limit their liabilities for disabilities that predate an individual’s coverage.

Two waiting periods include the preeligibility period and an elimination period. The preeligibility period spans from the initial date of hire to the time of eligibility for coverage in a disability insurance program. Once the preeligibility period has expired, an elimination period refers to the minimum amount of time an employee must wait after becoming disabled before disability insurance payments begin. Employees are responsible for paying a limited amount to cover the costs of treating illness or injury. Employers prefer disability insurance policies with longer elimination periods because the premiums (costs to purchase insurance coverage) are lower. Insurance companies charge less for policies with longer elimination periods because longer periods reduce the amount the company will have to pay in claims. The most common elimination period for short-term disability plans is three months, but it can range anywhere between one month and a year.

Short-term disability plans often contain exclusion provisions. Exclusion provisions list the particular health conditions that are ineligible for coverage. Disabilities that result from self-inflicted injuries are almost always excluded. Short-term disability plans often exclude most mental illness or disabilities due to chemical dependencies (for example, addictions to alcohol or illegal drugs). Employers support addicted workers through separate programs known as employee assistance programs.

LONG-TERM DISABILITY INSURANCE

Long-term disability insurance carriers use a two-stage definition for long-term disability. At the first stage, long-term disability refers to illnesses or accidents that prevent an employee from performing his or her “own occupation” over a designated period. The term own occupation refers to education, training, or experience necessary to perform work in one’s occupation such as a pipefitter or crane operator. After the designated period elapses, the second stage definition adds the phrase “inability to perform work in any occupation or paid employment.” The second-stage definition is consistent with the concept of total disability in workers’ compensation programs.

Traditionally, long-term disability plans covered only total disabilities. More recently, many long-term disability insurance carriers have also added partial disabilities for the following reason. Including partial disabilities results in cost savings to insurance companies because, in most cases, totally disabled individuals avoid paid employment since they would forfeit future disability benefits. With the partial disabilities inclusion, insurance companies cover a portion of income loss associated with paid part-time employment while the disabled works on a part-time basis in any job. For example, long-term disability plans become effective when part-time employment falls below a designated level expressed as a percentage of income (adjusted for cost-of-living increases) prior to the qualifying event—for example, below 75 or 80 percent.

Maximum benefits usually equal 50 to 70 percent of monthly pretax salary, subject to a maximum dollar amount. Similar to short-term plans, the maximum benefit may be as high as $5,000 per month. Generally, long-term benefits are subject to an elimination period of anywhere between six months and one year, and usually become active only after an employee’s sick leave and short-term disability benefits have been exhausted. Payments of long-term disability benefits continue until retirement or for a specified number of months. Payments generally equal a fixed percentage of predisability earnings subject to a maximum amount as previously noted.

DISABILITY INSURANCE PROGRAMS

Employers may fund short- and long-term disability programs in three ways. First, employers may use an independent insurance company to provide disability benefits. Similar to health insurance programs, companies pay premiums to one or more insurance companies to insure against the costs of disabilities. Second, employers may support disability benefits through partial self-funding. This option applies mainly to long-term disability insurance programs. Under partial self-funding, employers pay claims from their assets invested in a trust fund for a limited period (e.g., two or three years) or up to a maximum dollar amount. Also, employers purchase stop-loss insurance from an independent insurance company to cover the claims that exceed the self- funding limits. Third, full self-funding arrangements may provide all disability benefits from company assets. Self-funded plans may be handled internally or through a third-party claims management company. When handled in this fashion, full self-funded plans are described as administrative services only (ASO) plans.

Employers should factor two considerations into their decisions to partially or fully self-fund disability insurance plans. First, the size of the employee group helps employers predict the probability of disability occurrences. Statistically, larger employee groups enable more accurate predictions than smaller groups. Predictions of tolerable disability events support partial or full self-funding. Second, estimating exposure or liability for disability claims is essential. Exposure refers to the anticipated amount of annual disability claims under partial and full self-funding. Employers consider their tolerance for risk and pursue either partial or full self-funding.

EMPLOYEE AND EMPLOYER TAX OBLIGATIONS

Taxation of employees and employers is specified in the Internal Revenue Service Code for accident and health insurance plans. Employers typically exclude their contributions to disability insurance programs as a normal ordinary and necessary business expense. Both FICA2 and FUTA 3 recognize payments to disabled employees or their beneficiaries as taxable wages for six calendar months following the last date of service.

Another important issue regarding taxation focuses on who is responsible for withholding FICA and FUTA taxes and making payments of these taxes to the federal government. In some cases, the employer has this responsibility. In other instances, an entity other than the employer has the responsibility for withholding and paying FICA and FUTA taxes based on their liability for losses: these are third-party payers or agents for employers. The distinguishing factor between third-party payers and agents rests on who assumes the responsibility for covering losses.

Independent insurance companies qualify as third-party payers because they bear the risk of loss. For taxation purposes, insurance companies are the employer because they render the disability payments to disabled employees and their dependents. As a result, independent insurance companies are responsible for withholding and paying both FICA and FUTA taxes.

Agents for employers administer an employer’s disability program, and could be a payroll service, accounting firm, or the employer’s internal payroll department. Technically, they do not bear the risk of loss because of their administration- only role. The employer is responsible for withholding and paying FICA and FUTA taxes. One exception applies. The agreement established between the employer and an external agency (i.e., accounting firm or payroll service) may specify who is responsible for FICA taxes.

RELATIONSHIPS BETWEEN COMPANY-SPONSORED DISABILITY PLANS AND BENEFITS LAWS

Four benefits laws influence the design and implementation of company-sponsored disability plans:

  • The Age Discrimination in Employment Act of 1967.
  • The Americans with Disabilities Act of 1990.
  • The Employee Retirement Income Security Act of 1974.
  • State workers’ compensation and Social Security disability regulations.

The Age Discrimination in Employment Act (ADEA) of 1967

The Older Workers Benefit Protection Act (OWBPA), the 1990 amendment to the ADEA, generally bans the termination of an employee’s long-term disability benefits for active employees based on age. The OWBPA applies the equal benefit or equal cost principle. Specifically, employers must offer benefits to older workers that are equal to or more generous than the benefits given to younger workers with one exception.

Employers may reduce the level and duration of any benefit when the cost for older workers is prohibitively high. However, employers may not use costs to legally exclude workers disabled at an older age for long-term disability benefits when workers disabled at a younger age receive these benefits.  An ADEA safe harbor allows employers to reduce the duration of long-term disability benefits as long as the level of benefits is the same for all workers with the same disability:

  • Occurrence of disability at or below age 60. Employers may terminate benefits at age 65.
  • Occurrence of disability after age 60. Employers may terminate benefits as early as five years following disablement.

That is, an employer may choose to lessen the amount of time disabled older employees may receive long-term disability benefits as long as all employees (regardless of age) with the same disability are subject to the shorter time. For example, it is legally permissible to shorten the time frame for Ms. Johnson, a disabled employee who lost her leg at age 66, from the standard ten-year benefits payment period to five years, as long as her employer consistently applies the shorter benefit payment period to all employees at any age who lost a leg.

The Americans with Disabilities Act of 1990

The Americans with Disabilities Act prohibits discriminatory employment practices against qualified individuals with disabilities. A qualified individual with a disability is a person who possesses the necessary skills, experience, education, and other job-related requirements and, regardless of reasonable accommodation, can perform the essential functions of the job. Two federal courts, the Sixth and Seventh Circuits, maintain that recipients of long-term disability benefits are not qualified individuals with the rights to raise ADA claims.

In addition, the U.S. Equal Employment Opportunity Commission (EEOC), the government entity that oversees the administration and enforcement of the ADA, ruled that employers may lawfully offer different benefits under disability retirement plans. According to the EEOC, disability retirement plans “provide lifetime income for an employee unable to work because of illness or injury, without regard to the employee’s age.” For example, it is permissible not to provide cost-of-living adjustments for disability benefits. It is also acceptable to include offset provisions in disability plans that reduce disability benefits to compensate for other insured income benefits. Employers violate the ADA when they do not extend coverage to qualified individuals with disabilities or they provide less favorable treatment. Examples of unfavorable treatment include exclusion of eligible qualified employees from participation in disability retirement plans and requiring a longer preeligibility period for qualified individuals with disabilities than for nondisabled employees.

The Employee Retirement Income Security Act of 1974

The Employee Retirement Income Security Act (ERISA) of 1974 regulates the establishment and implementation of company-sponsored benefits practices. These include the following plans:

  • Disability insurance
  • Health insurance
  • Life insurance
  • Pensions

Most titles of ERISA apply to pension and health insurance plans. Only Titles I, II, and III apply to nonpension benefits. Title I specifies a variety of protections for participants and beneficiaries and contains provisions that provide employees protections for benefits rights: reporting and disclosure, fiduciary responsibilities, and administration and enforcement. Title II has the IRC provisions pertaining to the taxation of employee benefits and pension plans. Title III addresses the administration and enforcement of ERISA, including the jurisdiction of relevant federal agencies.

State Workers’ Compensation and Social Security Disability Regulations

Employees may receive long-term disability benefits from public disability programs (Social Security disability and workers’ compensation) and company-sponsored pro- grams. Company-sponsored insurance plans may include an offset provision.

Offset provisions reduce company-sponsored disability benefits by subtracting a particular percentage of the amount an employee is eligible to receive from workers’ compensation or Social Security. Offset provisions limit the total disability benefits amount an individual receives. Without offset provisions, an employee stands to earn as much or more than their income prior to becoming disabled. The goal of all disability programs is to provide some income replacement, not total or excess income replacement.

ORIGINS OF LIFE INSURANCE

Many of the social forces that gave rise to Social Security survivors’ insurance, workers’ compensation, and private disability insurance apply to the advent of private life insurance. In sum, the major factors include the era of industrialization in the United States, government-imposed wage freezes during World War II, and favorable tax treatment for employers and employees.

COVERAGE OF LIFE INSURANCE

In 2008, approximately 75 percent of full-time employees and 17 percent of part- time employees received employer-sponsored life insurance.

TYPES OF LIFE INSURANCE

Three kinds of life insurance plans are available: term life insurance, whole life insurance, and universal life insurance. Term life insurance, the most common type offered by companies, provides protection to employees’ beneficiaries only during a limited period based on a specified number of years (for example, 5 years) subject to a maximum age (usually 65 or 70). After that, the insurance automatically expires. Neither the employee nor his or her beneficiaries receives any benefit upon expiration of the plan. For example, if an employee chooses not to continue participation in a term life insurance plan after several years, she will not receive any benefits such as a cash payment, nor will her beneficiaries. To continue coverage under a term life plan, an employee must renew the policy and make premium payments as long as she is younger than the maximum allowed age for coverage.

Whole life insurance pays an amount to the designated beneficiaries of the deceased employee, but unlike term policies, whole life plans do not terminate until payment is made to beneficiaries. As a result, whole life insurance policies are substantially more expensive than term life insurance, making the whole life insurance approach an uncommon feature of employer-sponsored insurance programs. From the employee’s or beneficiary’s perspective, whole life insurance policies combine insurance protection with a savings feature (or cash accumulation plan) because a portion of the money paid to meet the policy’s premium will be available in the future plus interest earned on this amount. Fixed annual interest rates of 2 or 3 percent are fairly common (which is substantially higher than the interest rates applied to money in a savings account held in a bank or credit union).

Universal life insurance provides protection to employees’ beneficiaries based on the insurance feature of term life insurance and a more flexible savings or cash accumulation plan than that found in whole life insurance plans. Our focus will be on employer-sponsored group term life insurance and universal life insurance.

GROUP TERM LIFE INSURANCE

Offering term life insurance to a group of employees does not constitute a group term life insurance plan. This designation generally rests on providing term life insurance to at least 10 full-time employees who are members of a group of employees. This minimum coverage rule has two major exceptions. Exhibit 7.1 lists them.

Employers may offer group term life insurance on a contributory or noncontributory basis. Under contributory plans, employees pay the entire insurance premium or they share the cost with their employer. Under noncontributory plans, the employer pays the entire premium for coverage within designated limits (e.g., twice an employee’s annual salary). Most group term life insurance is offered on a noncontributory basis mainly because the employer receives substantially higher tax benefits with noncontributory than with contributory plans.

Term life insurance plans must meet four criteria for classification as a group term plan. Meeting all four criteria makes a group term plan eligible for favorable tax treatment under Internal Revenue Code Section 79. Exhibit 7.2 lists these four criteria.

Section 79 of the Internal Revenue Code specifies that the cost of employer- provided group term life insurance qualifies as a tax-free benefit to an employee, with some exceptions. Section 79 includes the following five criteria, which are described in Exhibit 7.3, to determine tax qualification:

• General rule for tax benefits of group term life insurance.

• Exceptions to the general rule that imposes taxation.

• Determination of cost of insurance.

• Nondiscrimination requirements—nondiscrimination rules prohibit employers from discriminating in favor of highly compensated employees in contributions or benefits, availability of benefits, rights, or plan features.

• Employee includes former employee for Internal Revenue Service Code, Section 79.

EXHIBIT 7.1 Exceptions for Minimum Group Term Life Insurance Coverage

A group may include fewer than 10 full-time employees if:

  First, the insurance is provided to all full-time employees, including full-time

  employees who show evidence of insurability when required. Employees

  must receive insurance coverage as a percentage of compensation or on

  coverage brackets set by the insurance company. Insurance companies may

  reduce benefits for full-time employees with some limitations to evidence

  of insurability.

   Second, the insurance is provided under a common plan to the employees of two or more unrelated employers. In addition, the insurance is restricted to, but mandatory for, all employees who belong to, or are represented by, a union or other employee representative. Finally, evidence of insurability does not affect an employee’s eligibility for insurance or the amount of insurance provided to that employee.

EXHIBIT 7.2 Criteria for Exempting Group Term Life Insurance for Taxation

  • It provides a general death benefit that is excludable from gross income under Internal Revenue Code, Section 101(a).
  • It is provided to a group of employees.
  • It is provided under a policy carried directly or indirectly by the employer.
  • The amount of insurance provided to each employee is computed under a formula that precludes individual selection. This formula must be based on factors such as age, years of service, compensation, or position. This condition may be satisfied even if the amount of insurance provided is determined under a limited number of alternative schedules that are based on the amount each employee elects to contribute. However, the amount of insurance provided under each schedule must be computed under a formula that precludes individual selection.

EXHIBIT 7.3 Internal Revenue Code Section 79: Group Term Life Insurance Purchased for Employees

79(a) General Rule

There shall be included in the gross income of an employee for the taxable year an amount equal to the cost of group term life insurance on his life provided for part or all of such year under a policy (or policies) carried directly or indirectly by his employer (or employers); but only to the extent that such cost exceeds the sum of—

79(a)(1) the cost of $50,000 of such insurance, and

79(a)(2) the amount (if any) paid by the employee toward the purchase of such insurance.

79(b) Exceptions

Subsection (a) shall not apply to—

79(b)(1) the cost of group term life insurance on the life of an individual which is provided under a policy

carried directly or indirectly by an employer after such individual has terminated his employment with

such employer and is disabled (within the meaning of section 72(m)(7)),

79(b)(2) the cost of any portion of the group term life insurance on the life of an employee provided

during part or all of the taxable year of the employee under which—

79(b)(2)(A) the employer is directly or indirectly the beneficiary, or 79(b)(2)(B) a person described in

section 170(c) is the sole beneficiary, for the entire period during such taxable year for which the

employee receives such insurance, and 79(b)(3) the cost of any group term life insurance which is

provided under a contract to which section 72(m)(3) applies.

79(c) Determination of Cost of Insurance

For purposes of this section and section 6052, the cost of group term insurance on the life of an employee provided during any period shall be determined on the basis of uniform premiums (computed on the basis of five-year age brackets) prescribed by regulations by the Secretary.

79(d) Nondiscrimination Requirements

79(d)(1) In general, in the case of a discriminatory group term life insurance plan—

79(d)(1)(A) subsection (a)(1) shall not apply with respect to any key employee, and 79(d)(1)(B) the cost

of group term life insurance on the life of any key employee shall be the greater of—

79(d)(1)(B)(i) such cost determined without regard to subsection (c), or 79(d)(1)(B)(ii) such cost

determined with regard to subsection (c).

79(d)(2) Discriminatory Group Term Life Insurance Plan

For purposes of this subsection, the term “discriminatory group term life insurance plan” means any plan

of an employer for providing group term life insurance unless—

79(d)(2)(A) the plan does not discriminate in favor of key employees as to eligibility to participate, and

79(d)(2)(B) the type and amount of benefits available under the plan do not discriminate in favor of

participants who are key employees.

79(d)(3) Nondiscriminatory Eligibility Classification

79(d)(3)(A) In general, a plan does not meet the requirements of subparagraph (A) of paragraph (2)

unless—

79(d)(3)(A)(i) such plan benefits 70 percent or more of all employees of the employer, 79(d)(3)(A)(ii) at

least 85 percent of all employees who are participants under the plan are not key employees,

79(d)(3)(A)(iii) such plan benefits such employees as qualify under a classification set up by the

employer and found by the Secretary not to be discriminatory in favor of key employees, or

79(d)(3)(A)(iv) in the case of a plan which is a part of a cafeteria plan, the requirements of section

125 are met.

79(d)(3)(B) Exclusion of Certain Employees

For purposes of subparagraph (A), there may be excluded from consideration—

79(d)(3)(B)(i) employees who have not completed 3 years of service; 79(d)(3)(B)(ii) part-time or

seasonal employees; 79(d)(3)(B)(iii) employees not included in the plan who are included in a unit of

employees covered by an agreement between employee representatives and one or more employers

which the Secretary finds to be a collective bargaining agreement, if the benefits provided under the

plan were the subject of good faith bargaining between such employee representatives and such

employer or employers; and 79(d)(3)(B)(iv) employees who are nonresident aliens and who receive no

earned income (within the meaning of section 911(d)(2)) from the employer which constitutes

income from sources within the United States (within the meaning of section 861(a)(3)).

79(d)(4) Nondiscriminatory Benefits

A plan does not meet the requirements of paragraph (2)(B) unless all benefits available to participants

who are key employees are available to all other participants.

79(d)(5) Special Rule

A plan shall not fail to meet the requirements of paragraph (2)(B) merely because the amount of life

insurance on behalf of the employees under the plan bears a uniform relationship to the total

compensation or the basic or regular rate of compensation of such employees.

79(d)(6) Key Employee Defined

For purposes of this subsection, the term “key employee” has the meaning given to such term by

paragraph (1) of section 416(i). Such term also includes any former employee if such employee when he

retired or separated from service was a key employee.

79(d)(7) Exemption for Church Plans

79(d)(7)(A) In general, this subsection shall not apply to a church plan maintained for church

employees. 79(d)(7)(B) Definitions: For purposes of subparagraph (A), the term “church plan” and

“church employee” have the meaning given such terms by paragraphs (1) and (3)(B) of section 414(e),

respectively, except that—79(d)(7)(B)(i) section 414(e) shall be applied by substituting “section

501(c)(3)” for “section 501” each place it appears, and 79(d)(7)(B)(ii) the term “church employee” shall

not include an employee of—79(d)(7)(B)(ii)(I) an organization described in section 170(b)(1)(A)(ii) above

the secondary school level (other than a school for religious training), 79(d)(7)(B)(ii)(II) an organization

described in section 170(b)(1)(A)(iii), and 79(d)(7)(B)(ii)(III) an organization described in section 501(c)(3),

the basis of the exemption for which is substantially similar to the basis for exemption of an

organization described in subclause (II).

79(d)(8) Treatment of Former Employees

To the extent provided in regulations, this subsection shall be applied separately with respect to former

employees.

79(e) Employee Includes Former Employee

For purposes of this section, the term “employee” includes a former employee.

TAX TREATMENT OF GROUP TERM LIFE INSURANCE

Employers may deduct the paid premium amount as an ordinary and necessary business expense for noncontributory plans and their contributions to contributory plans of group term life policies. There is one exception: The beneficiary of the policy must be someone other than the employer. Employers may not deduct the paid premiums whenever they list themselves as the primary or secondary beneficiary.

These rules apply regardless of whether employers meet the tax qualification criteria for employees stated in Internal Revenue Service Code, Section 79.

Employees must pay taxes on an employer’s contributions to group term life insurance programs except for (1) the first $50,000 of coverage when it meets the criteria for tax qualification contained in Section 79, and (2) the employer is the beneficiary under the group term life insurance policy.

The first statement contains three exceptions that permit employees to exclude group term life insurance coverage in excess of $50,000.

1. An employee’s voluntary employment termination for a disability that may lead to incapacitation for an indefinite period or death.

2. An employee voluntarily naming the employer as the primary or secondary beneficiary or a tax-exempt charity as the sole beneficiary.

3. An employee receives group term life insurance coverage when purchased under a qualified pension, profit-sharing, stock bonus, or annuity plan, and the insurance benefits are payable to a participant or his or her beneficiary.

A point of clarification is in order. Employers’ costs for the purposes of Section 79 do not refer to the actual annual premium amounts. Rather, employers’ costs are based on a regulation established by the U.S. Code in a table titled “Uniform Premiums for $1,000 of Group Term Life Insurance Protection.” It expresses the monthly cost for group term life insurance based on sex and age (five-year brackets). Exhibit 7.4 contains the Uniform Premiums table for age only.

The cost amounts listed in the current version of this table represent mortality experience for group term life insurance subscribers between 1985 and 1989. Insurance providers use mortality tables to decide whether to offer insurance and, if so, the terms and premium amount. This decision-making process is known as underwriting. Mortality tables indicate yearly probabilities of death based on factors such as age and sex established by the Society of Actuaries. The Uniform Table combines probabilities for men and women. The values in the current Uniform Table were adjusted to reflect lower rates of mortality between 1988 and 2000.

Exhibit 7.4

UNIVERSAL LIFE INSURANCE

Universal life insurance combines features of term life insurance and whole life insurance. Universal life insurance was created to provide more flexibility than whole life insurance by allowing the policyowner to shift money between the insurance and savings components of the policy. The insurance company initially breaks down the premium into insurance and savings. The policyowner may make adjustments to the amounts of the premium that are directed to insurance and savings. For example, if the savings portion is earning a low return, it can be used instead of external funds to pay the premiums. Also, unlike whole life insurance, universal life policies permit the cash value of investments to grow at a variable rate that is tied to market rates. As a result, the premium, benefits, and payment schedules will change.

ACCIDENTAL DEATH AND DISMEMBERMENT INSURANCE

Accidental death and dismemberment insurance (AD&D) covers death or dismemberment as a result of an accident. Dismemberment refers to the loss of two limbs or the complete loss of sight (i.e., blindness). Compared to life insurance, AD&D generally does not pay survivor benefits in the case of death by illness. AD&D premiums are generally lower than life insurance because the incidence of death by accident is lower than death by natural causes.

At one time, AD&D protection was provided as an extra provision in a company’s group life insurance program. However, as more and more workplaces contain fewer hazards with the decline of the manufacturing and mining business sectors, but heavily emphasize Safety Training where relevant, accidental death at work has become less of a concern. Also, as the cost of providing mandatory workers’ compensation coverage has risen substantially over the years, companies have found that including AD&D coverage was becoming cost prohibitive. In many workplaces, companies offer voluntary AD&D coverage, which means that employees who wish to have this coverage may pay the premium under the company’s group contract. In addition, most companies shy away from AD&D because an employee older than age 40 is more likely to die from natural causes than from an accident. This statistic is important considering that a large proportion of the workplace is older than age 40. Companies are more inclined to spend their benefits dollars on health insurance, or increase contributions to 401(k) retirement accounts, because most employees stand to benefit more from health insurance and retirement plans than AD&D coverage. Nevertheless, many companies do include AD&D coverage to employees on a voluntary basis. Offering voluntary AD&D coverage to employees has been a reasonable compromise between balancing employers’ costs and the limitations of workers’ compensation insurance in some states that pay relatively small benefits for accidental death or dismemberment.