Defined Benefit Plan
Definition of "Defined benefit plan"
Retirement plan under which benefits are fixed in advance by formula, and contributions vary. The defined benefit plan can be expressed in either of two ways:
- Fixed Dollars: Unit benefit approach a discrete unit of benefit is credited for each year of service recognized by the employer.The unit is either a flat dollar amount or (more often) a percentage of compensation usually 1 1/2-2 1/2%. Total years of service are multiplied by this percentage. For example, if total years of service is 30 and the percentage is VA, 45% would be applied to either the career average earnings or final average earnings (highest three of five consecutive years of earnings). If the average of the highest five consecutive years of earnings is $100,000, the yearly retirement benefit would be $45,000. Level Percentage of Compensation After a minimum number of years of service (usually 20) and a minimum age (usually 50), all employees will receive the same percentage of earnings as a retirement benefit, regardless of income, position in the company, or years of service. For example, each employee who is at least 50 years of age, with at least 20 years of service receives 20% of compensation. This plan is more common than the flat amount approach described below, Flat Amount After having attained a minimum number of years of service (usually 20) and a minimum age (usually 50), all employees will receive the same absolute dollar amount as a retirement benefit, regardless of income, position in the company, or years of service. For example, each employee who is at least 50 years of age, with at least 20 years of service receives $8000 a year in retirement benefits.
- Variable Dollars: Cost-of-Living Plan benefits are modified according to changes in a predetermined price index usually, the Consumer Price Index (CPI). For example, when the CPI increases by at least 3% benefits are increased by that percentage, Equity Annuity Plan premiums are paid into a variable annuity plan to purchase accumulation units. At retirement, the accumulation units are converted to retirement units whose values fluctuate according to the common stock portfolio in which the premiums we reinvested.
Popular Insurance Terms
Additional Living Expense Insurance is a type of coverage present on several types of Homeowner’s Insurance that reimburses additional costs caused because of the insured’s ...
Coverage outside an insured's home for personal items usually carried or worn while traveling. Protection is for personal property (apparel and jewelry), not for real property or property ...
Group in which subscribing members agree to (1) regulations governing their behavior, and (2) the qualifications that reinsurance contracts ceded to them must meet in order to be ...
Interest adjusted method that measures the cost of life insurance. Named for the late distinguished actuary M. Albert Linton. This method compares a whole life policy with a combination of ...
Excess of the value of an insurer's admitted assets over the total value of its liabilities and minimum capital requirements established by applicable statutes designed to assure the ...
Type of accounting method, in life insurance, designed to match revenues and expenses of an insurer according to principles designed by the Financial Accounting Standards Board and the ...
Money paid through state and federal programs to workers who are temporarily unemployed. The program, which was created by the social security act of 1935, is managed by the individual ...
Arrangement by which a policy owner authorizes an insurance company to draft his checking account for premiums due on an insurance policy. The drafting is usually monthly, persistency of ...
Future benefits to be paid to the policyholders and beneficiaries, assigned surpluses, and miscellaneous debts. These primary liabilities take the form of reserves, which must be listed on ...
Have a question or comment?
We're here to help.