How Life Insurance Can Reward Executive Talent

Executive benefits are crucial in attracting and retaining talent, Kathleen Bilderback said, and she presented some ideas for those benefits during today’s NAIFA Performance + Purpose virtual convention. Bilderback is an executive benefit designer with Affinity Law Group.

She presented three ideas, plus a bonus idea.

1. Phantom Stock/Equity Plan

A deferred compensation plan that can carry adverse tax consequences if the IRS requirements are not met. All vested accrued benefits become immediately taxable, and the taxable amount is also subject to a 20% penalty and interest charges.

This plan pays out when an executive leaves the company, upon death or disability, during an unforeseen emergency, when there’s a change in company control or at a specified time. An executive is normally taxed at ordinary income rates - and the company gets a deduction – when the plan pays out.

Phantom equity can be used in various types of entities. It can be used when the company owners do not want to dilute ownership; when the owners only want to pay a benefit to participants upon a change of control or specified events; when the owners want to recruit, retain or reward executives; or when the owners want to link the amount of benefit to the company’s value.

 

2. Stock/Equity Appreciation Rights

 

This is a method for companies to give their management or employees a bonus if the company performs well financially. The participant will be taxed at ordinary income rates, generally at the time the benefit is paid.

Appreciation rights can be used when the owners do not want to dilute ownership; to recruit, retain or reward; and to provide an incentive tied to the company’s success on a go-forward basis.

Life insurance can be used to informally finance phantom stock and appreciation plans, Bilderback said. The advantages to using life insurance include tax-deferred cash accumulation, and tax-free access to policy values via withdrawals and loans. In addition, the company can receive tax-free death proceeds. Disadvantages include high early policy charges, difficulty in using policy values on older participants and the premium payments are not deductible.

 

3. Split-Dollar Life Insurance Solutions

In a split-dollar plan, the business and key employee or owner share the cost and benefits of a life insurance policy.

The advantages of this include being able to obtain significant amounts of life insurance for a minimal out-of-pocket cost for the employee, using the policy as a possible source of supplemental retirement income and minimal administration. Disadvantages include the perception that split dollar rules are complicated. In addition, the economic benefit may become prohibitively expenses for older employees, and there is no deduction allowed for the business’ share of the premium payment.

4. Bonus idea – SERP

Bilderback presented an additional idea – the supplemental executive retirement plan. It’s a split-dollar plan that provides a pre-retirement death benefit that is received free of income tax. The cash values of the same business-owned life insurance policy can be used to informally fund a SERP.

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.

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