THE AT&T
DIRECTORS INDIVIDUAL LIFE INSURANCE
PROGRAM
January 1, 1987
Revised 12/1/95
TABLE OF CONTENTS
PAGE
PROGRAM
OVERVIEW...............................................................1
ELIGIBILITY....................................................................1
COVERAGE.......................................................................1
INSURABILITY...................................................................1
PREMIUM SHARING/BENEFIT
SHARING................................................2
PREMIUM
PERIOD.................................................................2
PREMIUM
AMOUNT.................................................................3
PREMIUM
WAIVERS................................................................3
OWNERSHIP......................................................................3
CASH
VALUE.....................................................................3
CASH
AVAILABILITY..............................................................3
EARLY
RETIREMENT...............................................................3
CONTRACTUAL
AGREEMENT..........................................................3
TAXES..........................................................................4
ENROLLMENT.....................................................................4
Enrollment Package
Program Overview
The Directors Individual Life Insurance Program (DILIP) 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 70, 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 70 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 $100,000. Your death
benefit will increase annually at 7%. 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
DILIP is for non-employee members of the AT&T Board of Directors.
Coverage
The death benefit will automatically increase 7% on January 1 of each year.
Insurability
If you enroll within 60 days of becoming a Board Member, you are guaranteed to
be insured. If you choose to delay enrollment, proof of insurability may be
required at that time before a policy can be written or coverage increased. If
you are on disability at the time of eligibility, enrollment must be delayed
until you return to work.
Premium Sharing/Benefit Sharing
DILIP 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 70 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 Director's Program
Current Age 55
Annual
Premium Cash Value
Attained Death
Age Benefit Director
Company Director Company
- --- ------- --------
- ------- -------- -------
55 $100,000 $ 620
$10,959 0 $ 9,085
60 140,300 1,459
10,120 $ 9,362 64,447
65 196,700 3,345
8,234 52,636 112,066
69 257,900 4,384
7,195 118,594 142,495
70# 257,900 0
0 122,893 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
DILIP 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 70, 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 60, you and the Company will
continue premium contributions until the minimum is reached.
Premium Amount
Included as an attachment is a personal illustrations. The illustration shows
the Company's as well as your annual premium through the life of the policy.
Premium Waivers
There are no Premium Waivers associated with this policy.
Ownership
There are three options:
Board Member as Owner
All paperwork should be signed by Senior Manager as proposed insured
and owner.
Owner at Enrollment is not the Board Member
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
Kathy Pruna at
908 630-2827 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, 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.
Early Retirement
If you before age 70, the death benefit will continue to increase until age 70.
Both you and the Company will continue to pay premiums until you reach age 70 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 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.
Enrollment
Included with this package are the documents required for enrolling in the
Directors 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.