AT&T CORP.
SENIOR MANAGEMENT
BASIC LIFE INSURANCE PROGRAM
OCTOBER 1, 1990
Revised 5/17/95
SENIOR MANAGEMENT BASIC LIFE INSURANCE PROGRAM
TABLE OF CONTENTS
PROGRAM
OVERVIEW...............................................................1
ELIGIBILITY....................................................................2
COVERAGE.......................................................................2
CONVERSION
RIGHTS..............................................................2
PROGRAM
ILLUSTRATION...........................................................2
IMPUTED INCOME RATE COMPARISON WITH BASIC GROUP LIFE
INSURANCE.................3
PREMIUM
PERIOD.................................................................3
CASH
VALUE.....................................................................3
CASH
AVAILABILITY..............................................................4
INSURABILITY...................................................................4
TRANSFER/ASSIGNMENT OF
OWNERSHIP...............................................4
EARLY RETIREMENT OR
TERMINATION................................................5
DEMOTION.......................................................................5
CONTRACTUAL
AGREEMENT..........................................................6
SECURED
BENEFIT................................................................6
TAXES..........................................................................7
ENROLLMENT.....................................................................7
Program Overview
The Senior Management Basic Life Insurance Program (SMBLIP) is an arrangement
where the Company and you purchase a permanent life insurance policy on your
life. SMBLIP replaces the pre-age 65 one times salary rounded to the next higher
$1,000 death benefit provided under the AT&T Corp. Basic Group Life Insurance
Plan.
The Company pays the annual premium. Your W-2 will reflect an imputed income
amount associated with the insurance coverage provided to you under the policy.
In certain cases, e.g., your death before retirement, the total benefits will be
shared between the Company and your designated beneficiary but the Company will
share in the death benefit only to the extent that the total insurance amount
exceeds one times your salary rounded to the next highest $1,000. This type of
arrangement is known in the insurance industry as "Split Dollar."
After attaining normal retirement (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 and cease to have
any interest in the policy. The remaining cash value will be sufficient to
maintain your death benefit without further premium payments.
As in the Basic Group Life Insurance Plan, your death benefit will change to
reflect any change in your salary. At retirement, your death benefit will become
frozen at your final annual salary rounded to the next higher $1,000. During the
period in which the Company makes premium payments, your imputed income will
increase to reflect your increasing age, as well as any increase in death
benefit. Your imputed income will be lower than under the current Basic Group
Life Insurance Plan because it will be based on the insurers' term life
insurance rates, which are lower than the corresponding federal government
standard rates for group insurance. After premium payments discontinue, i.e.,
the later of your attaining age 65 or 10 years (in some cases it may be longer
to avoid violation of the Internal Revenue Service Regulations Section 7702
guidelines) from the policy issue date, you will have no further imputed income.
Although this arrangement is primarily designed to pay a benefit upon your
death, there is also a cash value build-up. 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.
AT&T Corp. has selected two insurers to provide the SMBLIP coverage. You will
therefore have two policies on your life; one from each insurer, and each
insurer will provide half the defined amount of death benefit on
your life.
Eligibility
SMBLIP is for active AT&T Corp. Senior Managers. Employees who
are promoted to
or hired as Senior Managers are immediately eligible to enroll in
this program.
Coverage
SMBLIP is provided as a replacement to the death benefit coverage associated
with the Basic Group Life Insurance Plan. The benefit is one times salary
rounded to the next higher $1,000.
The death benefit will be updated to reflect changes in your salary. There may
be circumstances where a large increase in salary and, therefore, a
corresponding increase in death benefit, will require providing medical
information to the insurer. By providing this medical information, the insurer
is able to keep the premium payments at the lowest level. A medical information
waiver, signed by you, will be kept on file in the event this circumstance
occurs. This will allow the Company to release, to the insurer, the required
information from your Company medical records. Higher death benefit coverage
associated with salary increases is guaranteed, no matter what your health
circumstances may be at that time.
Conversion Rights
If you were a participant in the AT&T Corp. Basic Group Life Insurance Plan at
the time you became eligible for SMBLIP, for a limited period of time you have
the right to convert your coverage under the Basic Group Plan to a separate
individual policy provided by the group insurance carrier. We suggest you
discuss this with your financial advisor before exercising or declining this
right. You may exercise this right by contacting your Executive Human Resources
Consultant or Rosemarie Wolfstromer at Metropolitan Life directly on
201-712-5463.
Program Illustration
Included as an attachment is a personal illustration based on your current
salary. This illustration shows your costs and benefits as well as the
Company's, over the life of the policy. It is provided to give a picture of how
the policy works and what your tax on imputed income might be, using an assumed
salary growth. The actual ongoing life insurance amounts will be different from
this illustration.
Imputed Income Rate Comparison with Basic Group Life Insurance
SMBLIP offers a cost-effective life insurance program for Senior Managers, with
imputed income rates substantially below the Basic Group Life rates. (The cost
to you of the SMBLIP will be the income tax payable on the amount of your
imputed income.)
Annual Imputed Income Rate per $1,000 of Life
Insurance
Federal Government
Standard Rates for
Age Basic Group
Life SMBLIP
---
- ---------------- ------
40 $
2.04 $ .57
45
3.48 .82
50
5.76 1.15
55
9.00 1.62
60
14.04 2.59
Premium Period
SMBLIP is designed for premiums to be extended over a period of time to ease the
impact on cash flow to the Company. This period is normally from the time of
your enrollment until the first policy anniversary after you reach age 65.
However, in all cases, 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, the Company will continue premium payments and you will continue
to recognize income until the minimum is reached.
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 provide the
death benefit coverage build on a tax advantaged basis in the policy. The
policy's cash value is the basis for your subsequent "premium free" death
benefit.
Cash Availability
Under SMBLIP you have considerably greater flexibility than under the Basic
Group Life Insurance Plan. After the Company interest has been satisfied, you
may reduce your death benefit and utilize the policy cash value in a number of
ways. For example:
a) Loans
The cash value attributed to you may be withdrawn in
the form of a
loan. There could be tax implications as well as
death benefit
diminution associated with a loan.
b) Income Stream or Lump Sum
It is possible 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 death benefit. Once
you convert, it
is not possible to re-establish the original death
benefit.
We suggest that you speak with your financial advisor before exercising these
options.
Insurability
During the enrollment period you will be guaranteed to be insured. Your imputed
income rate, however, will not depend on your health or smoking status. Rather,
it will differ from others depending only on age and amount of
Death Benefit.
This enrollment methodology also applies to new Senior Managers who enroll
within 60 days of becoming a Senior Manager. Enrollment after 60 days may
require a medical questionnaire or examination.
Transfer of Ownership
As with the Basic Group Life Insurance Plan, after you take ownership in the
policy, you may transfer ownership to anyone you choose, e.g., an individual,
trust, etc. Since these transfers are generally construed to be irrevocable, we
urge you to consult with an attorney and/or tax advisor before making this
decision.
Another option is for you to not take ownership, but rather another, e.g.,
individual, trust, etc., may apply for ownership of the policy. It is of
particular importance that if the original owner of the policy is not you, that
the owner should sign as the "Applicant/Owner" and you should sign the
application as the "Proposed Insured".
Early Retirement or Termination
If, at retirement, you are "Pension Eligible" (i.e., you retire on an immediate
Service or Disability Pension under the AT&T Corp. Management Pension Plan, or
with a Disability Allowance or Minimum Retirement Benefit under the AT&T Corp.
Senior Management Long Term Disability and Survivor Protection Plan) and you
have not reached normal retirement age (65), the Company will continue to pay
premiums until you reach age 65 or, if later, ten 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. During this period you
will continue to have imputed income based on your age and the amount of
insurance in force. At the end of this period, i.e., the later of the policy
anniversary immediately following your attainment of age 65 or the tenth (in
some cases it may be longer to avoid violation of the Internal Revenue Service
Regulations Section 7702 guidelines) policy anniversary, the premiums will cease
and the aggregate Company premiums will be returned to the Company.
If you separate from the Company without being Pension Eligible, the aggregate
amount of Company premiums paid up to that point will be immediately returned to
the Company from the cash value of the policy. You can, at your option, either
maintain the policy by paying the policy premiums, or you may use the remaining
cash value (if any) to buy other "self-supporting" life insurance, or you may
withdraw any remaining cash value and cancel the policy.
Whether or not you are Pension Eligible, if you leave the Company, and without
the Company's consent, establish a relationship with a competitor of the Company
or engage in activity in conflict with or adverse to the interests of the
Company under the standards of the AT&T Corp. Non-Competition Guidelines and as
determined by the AT&T Corp. Management Executive Committee, the process will be
the same as with retirement/termination without being Pension Eligible.
Demotion
If you are demoted to a position which is not a Senior Manager, the effect is
the same as if terminated from the Company. You will however, automatically
become re-eligible for coverage under the AT&T Corp. Basic Group Life Insurance
Plan.
Contractual Agreement
One of the unique aspects of this insurance policy is the existence of a
contract between you and AT&T Corp.. 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, or another, will own
the policy and determine who the beneficiary is. The Company will hold the
policy and have a "Collateral Assignment" from the owner entitling AT&T Corp.,
as long as it has a collateral interest in the policy, to any death benefit
amounts in excess of one times your salary, and all cash values up to an amount
equal to its cumulative premiums paid. This document is a legal agreement and as
such includes a significant amount of detail and warrants 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 cash value and death
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 aggregate premiums paid by the Company are 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.
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. SMBLIP
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
companies).
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
AT&T Corp. has selected two insurers to provide the coverage for each Senior
Manager. This was done to provide the best combination of premium rates and
Senior Manager protection. As such, there may be a requirement for some
duplication of forms, signatures, etc. Once enrollment has been completed,
however, this two insurer approach should have a minimal impact on you.
The documents required for enrolling in the Senior Management Basic Life
Insurance Program are included. The Application Forms require, for this program,
just a few basic pieces of information, as do the Beneficiary
Designation forms.
The documents include instructions on how to fill them out.
The Collateral Assignment requires signature only.
After completing the forms, enclose them in the self-addressed envelope and
return to the Executive Human Resources Group.