Exhibit (10)(iii)(A)3
THE AT&T
SENIOR MANAGEMENT INDIVIDUAL LIFE INSURANCE
PROGRAM
January 1, 1987
Revised 12/1/94
TABLE OF CONTENTS
PAGE
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PROGRAM OVERVIEW ......................................................... 1
ELIGIBILITY .............................................................. 1
COVERAGE ................................................................. 1
INSURABILITY ............................................................. 1
PREMIUM SHARING/BENEFIT SHARING .......................................... 2
PREMIUM PERIOD ........................................................... 2
PREMIUM AMOUNT ........................................................... 2
PREMIUM WAIVERS .......................................................... 2
OWNERSHIP ................................................................ 3
CASH VALUE ............................................................... 3
CASH AVAILABILITY ........................................................ 3
SECURED BENEFIT .......................................................... 3
EARLY RETIREMENT, TERMINATION OR DEMOTION ................................ 4
CONTRACTUAL AGREEMENT .................................................... 4
TAXES .................................................................... 4
ENROLLMENT ............................................................... 5
ENROLLMENT PACKAGE
PROGRAM OVERVIEW
The Senior Management Individual Life Insurance Program (SMILIP) is an
arrangement where the Company and you purchase a permanent life insurance
policy on your life and share the premium payment. If you die while AT&T is
still a party to the policy, typically before you reach age 65, the death
benefit is also shared between the Company and your designated beneficiary.
This type of arrangement this known in the insurance industry as "Split
Dollar." After attaining age 65 or if later, 10 years (in some cases it may
be longer to avoid violation of the Internal Revenue Service Regulations
Section 7702 guidelines) from the date of issuance of this policy, the Company
will recoup its premium payments from the cash value build-up in the policy
and cease to have any interest in the policy. The remaining cash value will
be sufficient to give you a "paid-up" death benefit after attaining normal
retirement age, i.e., all premiums will cease and the death benefit of the
policy will be secured for the designated beneficiary with no further cost to
you.
At the time of enrollment your death benefit will be, at your option, one or
one-and-one-half times base salary. Your death benefit will increase annually
at 7% to approximate assumed growth in base salary over an extended period of
time. The premium cost to you will also increase to reflect your increasing
age as well as the increased death benefit. The Company will pay a
significant portion of the premium (see the attached illustration). Over
time, the Company portion of the premium will decrease.
Although this arrangement is primarily designed to pay a benefit upon your
death, there is also a cash value build-up occurring coincident with the
premium payments that continues after the premium payments cease. Once
sufficient funds have accumulated and the Company no longer has an interest in
the policy, because it has recouped its premiums, you have the option to use
some or all of the remaining cash in lieu of some or all of the death benefit.
ELIGIBILITY
SMILIP is for AT&T Senior Managers. Employees who are promoted or hired into
Senior Management are immediately eligible to enroll in this program.
COVERAGE
Once you select the amount of coverage (one or one-and-one half times base
salary), the death benefit will automatically increase 7% on January 1 of each
year to approximate salary increases. Periodically over the life of the
policy this amount may be adjusted by the Company to more closely approximate
your actual salary.
INSURABILITY
If you enroll within 60 days of becoming a Senior Manager, you are
guaranteed to be insured. You may lower your coverage, e.g.,
one-and-one-half times to one times at any point after enrollment. If
you choose to delay enrollment or later choose to increase coverage,
e.g., one times to one-and-one-half times, proof of insurability may be
required at that time before a policy can be written or coverage
increased. If you are on disability (i.e., receiving Sickness and
Disability Benefits) at the time of eligibility, enrollment must be
delayed until you return to work.
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PREMIUM SHARING/BENEFIT SHARING
SMILIP has its origin in what the insurance industry calls a "Split
Dollar" program. The term "Split Dollar" insurance comes from a concept
of the Employer and the Employee sharing the premium payment on a life
insurance policy on the employee. At age 65 or if later, 10 years (in
some cases it may be longer to avoid violation of the Internal Revenue
Service Regulations Section 7702 guidelines) from the date of issuance
of the policy, the Company's aggregate premiums are returned from a
"special" cash value built into the policy expressly for this purpose.
Should you die before the Company's aggregate premiums are returned,
death benefit payments are made to both the Company and your
beneficiary. However, the benefit the Company receives DOES NOT REDUCE
THE DEATH BENEFIT PAID TO YOUR BENEFICIARY. After the Company's
aggregate premiums are returned, the Company no longer has an interest
in the policy. At that time you will have a "paid up" permanent life
insurance policy with a cash value that can be made available to you at
your option.
EXAMPLE:*
Sample Senior Manager's Program
Current Age 50
Annual Premium Cash Value
Attained Death Senior Senior
Age Benefit Manager Company Manager Company
50 $200,000 $ 880 $17,090 0 $ 14,350
55 280,500 1,740 16,232 $ 15,700 101,000
60 393,400 4,092 13,878 85,350 178,500
64 515,700 5,364 12,606 195,700 231,000
65# 515,700 0 0 203,800 0
* This example is for illustrative purposes only and assumes a 7% annual
growth in death benefit (assumed base salary) and an 8% yield on
investment for the cash value. The yield on investment is not
guaranteed.
# At normal retirement the death benefit becomes constant, premiums
cease, the Company's aggregate premiums are returned and your cash value
may continue to grow.
PREMIUM PERIOD
SMILIP is designed for premiums to be extended over a period of time to ease
the impact on cash flow to both you and the Company. This period is normally
from the time of your enrollment until you reach age 65, however, premiums
must be paid for a minimum of 10 years (in some cases it may be longer to
avoid violation of the Internal Revenue Service Regulations Section 7702
guidelines). Therefore, if you enroll in the program after age 55, you and
the Company will continue premium contributions until the minimum is reached.
PREMIUM AMOUNT
Included as an attachment are two personal illustrations (one times and
one-and-one-half times your base salary coverage). The policy, when issued,
will be based on illustration that you elect. These illustrations show the
Company's as well as your annual premiums through the life of the policy.
PREMIUM WAIVERS
There are no Premium Waivers associated with this policy.
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OWNERSHIP
There are three options:
SENIOR MANAGER AS OWNER
All paperwork should be signed by Senior Manager as proposed insured and
owner.
OWNER AT ENROLLMENT IS NOT THE SENIOR MANAGER
Another option is for you not to take ownership, but rather another,
i.e., individual, trust, etc., apply for ownership of the policy. It is
of particular importance that if the owner of the policy is not you, the
owner must sign as the "Applicant/Owner" and you must sign the
application as the "Proposed Insured".
TRANSFER OF OWNERSHIP
The owner of this policy may subsequently transfer ownership to another,
i.e., an individual, trust, etc. Please contact Executive Human
Resources at 908 221-4444 for the necessary forms and/or information.
SINCE OWNERSHIP HAS LONG TERM AND/OR IRREVOCABLE IMPLICATIONS, WE URGE
YOU TO CONSULT WITH AN ATTORNEY AND/OR TAX ADVISOR BEFORE MAKING THIS
DECISION.
CASH VALUE
This program is designed to provide you with a pre- and post-retirement
death benefit. However, in addition to the death benefit, there is a
cash value build-up. That is, part of each premium is placed in an
"investment fund" to earn income. Investment earnings beyond the
amounts necessary to increase the death benefit (as your salary
increases) build on a tax advantaged basis in the policy.
CASH AVAILABILITY
CASH BUILD-UP
Your share of the cash build-up will not begin until several years
into the policy but will build quickly after that. As with any
cash amount, the longer it is left intact the greater the amount
will be.
LOANS
The cash value attributed to you may be withdrawn in the form of a
loan after the Company no longer has an interest in the policy.
There are certain restrictions and tax implications associated
with a loan. We suggest that you speak with your financial
counselor/tax advisor before taking such a step.
INCOME STREAM OR LUMP SUM
It is possible, after retirement, to convert all or any portion of
the policy from a death benefit to either an income "stream"
(i.e., an annuity) or a lump sum cash payout. The extent to which
you convert to income or cash will cancel or reduce the valuable
death benefit. Once you convert, it is not possible to
re-establish the original death benefit.
SECURED BENEFIT
Changes to the tax law over the years have required more and more
of the Senior Management benefit programs to be paid from Company
operating income.
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SMILIP allows the Company to contribute towards the cost of this
program on a timely basis while securing the benefit payment from
a third party (the insurance company).
EARLY RETIREMENT, TERMINATION OR DEMOTION
If, at retirement, you are "Pension Eligible" (i.e., you retire on a
Service or Disability Pension under the AT&T Management Pension Plan, or
with a Disability Allowance or Minimum Retirement Benefit under the AT&T
Senior Management Long Term Disability and Survivor Protection Plan) and
before age 65, the death benefit will continue to increase until age 65.
Both you and the Company will continue to pay premiums until you reach
age 65 or if later, 10 years-(in some cases it may be longer to avoid
violation of the Internal Revenue Service Regulations Section 7702
guidelines) from the date of issuance of the policy. At that time the
premiums will cease and the Company's aggregate premiums will be
returned to the Company. If you leave the Company and engage in
competitive activity as determined by AT&T, the process will be the same
as with retirement/termination without being Pension Eligible or
demotion.
If you separate from the Company without being Pension Eligible or are
demoted to a non Senior Manager position, the Company's aggregate
premiums will be immediately returned to the Company. You can, at your
option, either maintain the policy by continuing to pay the total
premium, i.e., both your amount and the amount previously paid by the
Company, use the remaining cash value (if any) to buy paid up life
insurance, or withdraw any remaining cash value and cancel the policy.
CONTRACTUAL AGREEMENT
One of the unique aspects of this insurance policy is the existence of a
contract between you and AT&T. This agreement has no relationship to
employment or any other benefit but rather defines the responsibilities
of both the Company and you in the operation of the policy. You will
own the policy and determine who beneficiary. The Company will hold the
policy and have a "Collateral Assignment" from the owner (you or another
you name) entitling AT&T, as long as it has a collateral interest in the
policy, to an amount equal to its premiums paid. This document is a
legal agreement and as such includes a significant amount of detail and
warrants your careful review before signing. Although somewhat unique
to life insurance, a collateral assignment is similar in context to an
automobile loan where the car becomes "collateral" for the money lent to
buy it. In this case, a portion of the value and benefit of the policy
is the collateral the Company receives for contributing premium payments
to "buy" the life insurance policy. The agreement is satisfied when the
premium paid by the Company is returned. Some of the major sections of
the agreement are:
- Description of the policy
- How the premiums are paid
- How the proceeds are paid
- How the agreement terminates
- Claims procedure
- Description of the assignment
The Agreement is included with this package.
TAXES
Split Dollar life insurance policies have been in existence for decades. The
IRS has issued several rulings over this period which treat these policies
favorably from a tax perspective. However, the Company does not assure any
particular tax treatment and recommends that you review your own situation
with your personal attorney and/or tax advisor.
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ENROLLMENT
Included with this package are the documents required for enrolling in the
Senior Management Individual Life Insurance Program. The Application Form
while appearing lengthy requires, for our purposes, just a few basic pieces of
information, as does the Beneficiary Designation form. Both of these
documents include instructions on how to complete. The Collateral Assignment
requires signatures only.
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