Life Insurance Financial Evaluations, LLC

Life Insurance Performance Assessment



 
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Life Insurance Performance Measurement & Variance Analysis

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What is it?

A Life Insurance Performance Measurement & Variance Analysis compares the inforce policy projections to the baseline (as sold illustrations).  This analysis also identifies variances between the baseline and current projections for time, cost and scope and their root causes.  Insurance illustrations are hypothetical and actual results will differ from the illustrations.  By continuously measuring performance against the plan, one can see changes and variances, exert influence, and identify the need for corrective actions where necessary.  Identifying root causes helps to determine any corrective or preventative actions that may be taken to course correct the plan or improve the probability of success.  By performing periodic policy measurement, project costs can be estimated and controlled, increasing the likelihood the project will be completed within the approved budget.

Why it is Important?

It is important to periodically measure how the plan is performing compared to the baseline projections.  Life insurance policies are based on many assumptions and there are a number of factors that may impact the long term success of the plan.  If these factors are not monitored and the plan is neglected, it may become too expensive and cost prohibitive to implement the necessary changes to achieve the desired benefits and outcomes.  Periodically measuring helps to identify these issues early enough to make the necessary changes before they become too expensive.  Moreover, if a policy is not proactively monitored, the policy may lapse prior to mortality age and result in little to no return on investment.  For COLI plans, this analysis should be conducted in conjunction with Deliverable 3B since the life insurance funding is directly impacted by the plan, particularly when the insurance premiums are dependent on plan contributions.

How do we do it?

Life Insurance Financial Evaluations, LLC uses proprietary Microsoft Excel financial models to compare life insurance policies by calculating expected rates of returns, equivalent taxable yields, and net present value of life insurance cash values and death benefits.  The results are then summarized into a written report.

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 Nonqualified Benefit Plan Liability Projections & Financial Forecasting






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What is it?

Nonqualified Benefit Plan Liability & Financial Forecasting projects nonqualified employee benefit plan liabilities on a static (current participants) and dynamic basis (considering turnover of existing participants and new participants enter the plan).  The analysis includes cash flow, profit & loss, balance sheet, and asset/liability matching and may include personalized individual benefit statements.  Plan projections may be for either defined contribution or defined benefit plans.

Why it is Important?

When analyzing COLI plans, it is important to forecast the benefit plan liabilities based on how the plan is projected to work in the future.  It is important to project plan liabilities on both a static and dynamic basis.  Life insurance premium amounts and durations are often overestimated since projections fail to incorporate participant turnover and plan payouts.  This leads to an expectation of higher premiums for longer durations.  When turnover is neglected and actual premiums are less than anticipated, this often results in underfunded policies and higher policy expenses, and thus poor policy performance compared to the baseline expectations for the funding strategy. 

When COLI plans become underfunded, premiums should be allocated on an individual performance basis instead of a pro-rata allocation.  This is especially true when the plan includes policies with differing ages, death benefits, and/or premium allocations.  When combined with Deliverable 3A, an overall snapshot of the plan assets, plan liabilities, and their impact on corporate financials is provided.  This overall snapshot helps the plan sponsor make adjustments and determine the projected cash flows available for funding the plan.  If cash flows will be insufficient, alternatives such as surrendering one or more policies may be prudent in order to prevent the overall plan from becoming compromised.

How do we do it?

Life Insurance Financial Evaluations, LLC uses proprietary Microsoft Excel to calculate nonqualified benefit plan projections on an individual participant basis (static environment).  We also project benefits on a dynamic basis (considering participants exit the plan and are replaced by new participants).  These models often utilize Visual Basic macros to efficiently make calculations for plans with hundreds or thousands of participants.  In addition, the financial impact of the plan on corporate financial statements is also included.  The results are then summarized into a written report.