Life Insurance Financial Evaluations, LLC
Definitions of Policy, Portfolio, Program Management

Before we discuss our service offerings in detail, let's first discuss some terminology for policy, portfolio, and program management.

Life insurance policy management has unique complexities and challenges depending on the nature of the life insurance plan.  Life insurance plans may consist of a single policy, may be a portfolio of two or more policies, or may be directly or indirectly linked to a nonqualified employee benefit plan.  The descriptions below define these differences and some of the complexities and challenges inherent in successfully designing and managing the life insurance plan.  The term “life insurance plan” or “project” is used interchangeably to refer to any of the items below.

Policy – The term “policy” is used to refer to a life insurance plan with a single policy.  Life insurance policies have several moving parts in the form of premiums, cash values, loan balances, and death benefits that must be coordinated to achieve the desired outcomes.  Life insurance policies are available in many shapes and sizes; and each has unique characteristics.  Policy type, policy assumptions, plan sponsor (i.e., premium payor) budget, and contractual policy constraints can each have an impact on long term policy performance.  For instance, policies with more flexibility such as universal life or variable universal life may have higher variances than originally planned and thus require more frequent attention to review performance and identify any potential issues.

PortfolioThe term “portfolio” is used to refer to a life insurance plan with two or more policies.  The portfolio may be implemented for many purposes, including estate plans or nonqualified benefit plans, or for diversification of product type or insurance carrier.  Depending on the nature of the portfolio, plan sponsors may face additional complexities and challenges in the ongoing management of the portfolio.

  • One Insured w/ Multiple Policies – When there are multiple policies on the same insured, it becomes important to coordinate the management of the policies that make up the portfolio.  For instance, if there are budgetary constraints that impact the cash flow available to make planned and necessary premium payments, it is critical that the premiums are efficiently allocated across the portfolio.  If not allocated properly, then one or more of the policies may underperform compared to the remainder of the portfolio, which could lead to lower overall plan results.  Portfolios that include multiple product types include additional complications when allocating premiums, since some policies may have premium flexibility while others have fixed premium requirements.
  • Multiple Insureds w/ One Policy Each – Companies often sponsor life insurance plans for key employees such as Split Dollar Life Insurance Plans and Section 162 Executive Bonus Plans.  These plans involve the company purchasing policies on the lives of each key employee.  The policies may be owned by the company, the key employee, or a trust.  In most plans, the company is responsible for paying all life insurance premiums.  Premiums may be derived from a formula such as company revenue, growth, or profitability.  For these types of plans, policy issue ages, death benefits, and projected premiums will likely vary by insured.  When premiums are based on a formula, it is critical that policies be proactively managed.  If the formulas result in lower premiums paid than expected, then some policies may perform worse than others.  Therefore, it is prudent to review each policy on an individual basis to determine its impact and avoid a situation where some participants are negatively impacted more than their peers.  Otherwise, the employer may encounter negative employee relations and potential lawsuits.
  • Multiple Insureds w/ Multiple Policies – Similar to the other portfolio structures, having multiple policies on multiple insureds exacerbates the potential complications and the need for proactive management of the life insurance plan and allocate policy premiums.  Premium allocations are even more important when available cash flows are limited.

ProgramThe term “program” refers to a life insurance plan that is directly or indirectly tied to a nonqualified benefit plan such as a Deferred Compensation Plan or Supplemental Executive Retirement Plan (SERP).  Life insurance policies are utilized as tools to provide an asset to match or hedge the company liability created by the plan.  These life insurance plans are commonly referred to as COLI or BOLI plans; and policies may be designed to match individual liabilities or in aggregate.  Premiums and policy allocations may be dependent on the participant or overall plan results, such as tied to participant deferrals (or company contributions).  When participants vary their plan contributions year by year, or when participants exit the plan due to termination, retirement, or disability, this can significantly alter the estimated premiums available to sufficiently fund the policies.  This often leads to an over or underestimation of expected premiums.  In addition, when policy allocations mirror the account balance allocations, actual policy performance is dictated by plan results, and such allocations may not be based on the company’s risk tolerance.  This can lead to more aggressive or more conservative allocations in the policies than contemplated in choosing a policy growth assumption.  Therefore, when conducting performance measurements and forecasts, the nonqualified benefit plan must also be forecast to determine its financial results and how it may impact the life insurance portfolio.  Understanding the moving parts such as net plan cash flows (new deferrals less benefit payments) and making the proper portfolio adjustments may significantly improve the results.  In addition, care should be taken in the initial program design to contemplate these risks and factors.  If policy cash surrender values are accessed to provide cash to pay benefits, proactive management becomes even more critical.