30 October 2012 0 Comments

A Simple Benefit Plan For Key Employees

Group Term Life Insurance can be an important employee benefit.  However, it doesn’t  provide for much flexibility  if an employer wants to hand- pick an important employee for special  consideration since the amount of group insurance  is determined by a schedule based on the  position and/or salary of employees.   Enter the “Death Benefit Only (DBO) Plan funded with individual Term Insurance.

Take the case of the Ajax Distributing Co.  What do they distribute?  It doesn’t matter.  What does matter is that their controller is age 45 with a loving wife and three kids, ages 7, 10 and 15.  Charlie Controller earns $100,000 per year and his employer, Sam Ajax, wants to keep Charlie happy.  He’ll be getting the standard COLI raise this year, but Sam wants to do something extra for Charlie.

So, Sam brings Charlie into his office, tells him about his importance to the firm and how he wants to provide his family with greater security.  If Charlie dies before age 65 and he is still an Ajax employee at that time, Ajax will pay Charlie’s family $8,333 monthly income for 10 years following his death.  Wow!!  What a feeling of importance and security this sends to Charlie! Ajax has just guaranteed Charlie’s family $1,000,000 of income if he doesn’t live to the normal date of retirement.

All of this is contractually guaranteed to Charlie and Ajax makes sure the funds will be there by purchasing a $1,000,000 twenty year term policy on Charlie’s life.  Ajax is the owner and beneficiary of the policy.  Assuming Charlie can qualify for preferred non-tobacco user rates, the monthly premium will be about $125—guaranteed for the full 20 years.  Premiums are not tax deductible to Ajax, but the death benefit it receives will be tax free and the taxable payment of $8,333 per month to the family is tax deductible to Ajax.  If Charlie dies before age 65, taking all tax credits into account, Ajax will have sufficient proceeds to pay all benefits and likely recoup its entire cost with a little left over.  If Charlie doesn’t die prior to age 65 the maximum total cost to Ajax will be about $15,000.

All that’s needed to put this plan into effect is a corporate resolution, a DBO contract drafted by an attorney and an employee who can qualify for a life insurance policy.  There are no discrimination rules involved.  If you’re an employer, give some thought to which of your key employees this might appeal.  If you are an employee to whom this concept has appeal, suggest the plan to your employer.

Coming up…some more uses of life insurance in Key Employee Compensation Planning.

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