2 November 2012 0 Comments

Life Insurance As A Perk For Key Employees

In my last entry I discussed a Death Benefit Only (DBO) plan as a simple way to reward key employees with special benefits.  There are some other ways life insurance can be used to reward key employees and act as a “golden handcuff” by employers.

But, before going there, I want to make myself very clear: plain, old group term life insurance is still the most cost effective way for any employee to receive up to $50,000 of death benefit.  Its premium is tax deductible to the employer and tax free to the employee.  However, on amounts in excess of $50,000 an employee is hit with imputed income based on the government’s Table I:

Employee Age Monthly Cost per $1,000 in excess of $50,000
Under 25 $0.05
30-34 0.06
35-39 0.08
30-36 0.09
30-37 0.1
30-38 0.15
30-39 0.23
30-40 0.43
30-41 0.66
30-42 1.27
70 and above 2.06

Additionally, the amount of group term must be determined on a non-discriminatory basis.  So, employers who want to hand-pick key employees for extra perks often use the Group Carve Out (GCO) technique instead of traditional group term for amounts in excess of $50,000.

GCO uses individual life insurance policies instead of group.  The amount of coverage provided for a given employee need not meet anti-discrimination tests.  The policies, unlike group, are portable and they may be term or Universal Life.  The premium is tax deductible to the employer and taxable to the employee; however if term is used, the actual premium may be very close to the government’s Table I rates.  One disadvantage of GCO is that employees normally must medically qualify for coverage, while group insurance is usually issued with no individual underwriting requirements.

Using Life Insurance in Other Non-Qualified Plans

An employer designing a Non-Qualified Deferred Compensation or Supplemental Retirement Plan for key executives often uses life insurance as a means of funding these plans.  However, since these plans must be cautious to avoid current taxation to covered employees, the employee will have no rights to the insurance and existence of the policies will likely not be included in the written agreement between the employer and employee.  With this said, employers who are considering such plans should investigate the use of Indexed Universal Life policies as a highly tax advantaged way to provide the benefits and recoup their costs.

Coming up, I’ll be discussing Long Term Care Insurance as a key employee benefit.

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