How life insurance funds executive benefit plans

Companies have a common but growing problem: how to attract, reward and retain top leaders who drive revenue and ensure long-term prosperity. For decades, businesses used traditional compensation methods such as 401(k) plans, stock options and yearly bonuses to remain competitive. These methods are no longer effective, especially for high earners who quickly reach contribution limits or grow leery of market-based incentives.

This gap has created growth in executive benefits, building a $42 billion market and one of the fastest-growing segments in the industry. To insurance professionals, it’s not a trend; it’s a chance to provide real solutions to employers who need a new strategy.

The price of not planning: Moelis & Co.’s $25M lesson

Few stories illustrate the challenge more clearly than one that made headlines earlier this year. Moelis & Co., a global investment bank, provided founder Ken Moelis with a $25 million bonus granted in the form of partnership units to retain him at the helm though 2029, Bloomberg reported.

The price tag was hefty, but the reasoning was straightforward: Moelis is a rainmaker whose departure can have a material influence on the fate of the firm. Writing a check was the fastest remedy.

This leads one to ask: What if there had been a long-term plan? Would a well-designed executive benefit plan funded with life insurance been able to accumulate those assets over time, creating the same incentive with better tax benefits and less impact on cash flow?

Yes, and that’s why discussions regarding executive benefits are gaining momentum.

The shifting landscape

The executive benefits marketplace is influenced by several important factors. The most significant are the changing rules and regulations.

The Federal Trade Commission’s effort to ban noncompete agreements began in 2023. In April 2024, the FTC issued a final rule that would have banned the majority of non-compete agreements nationwide. But in 2024, a federal judge blocked the rule from taking effect. The FTC appealed the decision, and the case is pending before the U.S. Court of Appeals for the Fifth Circuit. 

Non-compete agreements remain enforceable under existing state laws until a final decision is made. Several states, including California, North Dakota, Oklahoma and Minnesota, have already enacted legislation that substantially restricts or prohibits non-compete agreements. The proposal of the rule and the subsequent legal fight took much of corporate America by surprise. Despite the fact that the rule has been stayed due to a court order, it illustrated a stark reality: Firms cannot simply rely on legal contracts to protect their leaders.

Laws change every few years, and businesses have to scramble to catch up. To most, the removal of non-compete agreements means that there is no longer one surefire legal way to stop top executives from walking out the door with clients, intellectual property or proprietary knowledge.

The result? Financial incentives have become an attractive way to reward executives while protecting a company’s future.

Post-pandemic priority

A further evolution occurred due to the COVID-19 pandemic. Executive priorities altered. These days there is more focus on financial security, long-term wealth creation and the preservation of family legacies.

For most executives, exhausting qualified retirement plans is not enough. Earnings caps on 401(k)s are reached very quickly for high-income earners, so they look for other tax advantaged means of building their wealth. 

Companies are under increasing pressure to offer creative alternatives that are different from the norm — alternatives that cause executives to stay and stake their financial future on the company’s success.

The opportunity for insurance professionals 

This is where insurance professionals can really add value. The increasing need for executive benefits is a special chance to provide customized life insurance solutions that solve critical business problems. 

All companies are vulnerable, especially ones that rely on employees with specialized knowledge or industries that often lose employees to competitors. 

Representatives who know how to identify an opportunity and consult on executive benefits strategies can see themselves as valuable insurance professionals instead of just salespersons.

Starting the conversation

The potential to lose a key executive is usually not obvious until it actually does take place. Then the alternatives are few and costly.

Advisors can help owners and human resource leaders with these discussions by asking probing and considerate questions:

» How many of your leaders are truly irreplaceable?

» Have you lost any executives to competitors recently?

» Are your top performers maxing out their 401(k)s?

» Would you be open to a tax-efficient strategy that rewards and retains your leadership team?

These questions naturally give rise to conversations regarding customized executive benefit programs — and how life insurance can solve these issues.

Major issues that executive benefits solve

Every business is faced with its own challenges in implementing effective executive benefits, most commonly:

» Keeping good employees, especially when other companies are recruiting in large quantities.

» Addressing the compensation gap — providing substantial additional compensation when executives max out on their 401(k)s.

» Securing the business in case a key leader quits, is injured or passes away.

Properly designed executive benefit plans — most financed through permanent life insurance — accomplish all three simultaneously.

Guaranteed issue: The foundation of executive benefit programs

One of the core strengths of executive benefit programs has always been the ability to secure guaranteed issue underwriting — removing traditional barriers and making implementation seamless for businesses.

Many carriers offer GI coverage based on simple census enrollment, eliminating the need for medical exams. For employer-owned plans, coverage typically starts with five to nine eligible executives, while employee-owned designs may require 10 or more participants.

The maximum face amount varies based on policy ownership and the product selected, and — with some carriers — can increase if their Executive Carve-Out Disability Insurance is also implemented. But obtaining coverage of up to $5 million on a guaranteed issue basis is possible.

Plan design

Executive benefits can be designed to fit the company’s objectives and budget. 

Employer-owned options are:

» Deferred compensation plans

» Retention bonus plans

» Endorsement split dollar arrangements

» Key person

Employee-owned options include:

» Executive bonus plans

» Restrictive executive bonus plans

» Loan regime split dollar arrangements

» Cross purchase buy-sell cases using the insurance-only LCC

Employee-owned plans are portable and flexible, which is an excellent advantage for executives.

Product solutions in executive benefits

Product preferences in executive benefits are also shifting. While variable life products once dominated the space, whole life insurance has gained popularity due to its guaranteed cash value accumulation and guaranteed death benefit.

Today, carriers offer GI whole life solutions across a variety of product designs, including regular full pay whole life, limited pay whole life such as ten pay and paid up at 65 whole life, and high early cash value whole life. Certain policies are designed to be nearly balance sheet neutral, offering up to 95% of the premium paid as cash value after the first year, making them highly attractive to businesses, especially a public corporation that prefers not to see a negative hit on its balance sheet due to the premium paid. 

Additionally, some carriers have expanded their offerings by providing a long-term care rider that can be added to any employee-owned policy. This indemnity-based LTC rider allows executives to accelerate a percentage of the death benefit dollar for dollar if they are unable to perform two of six activities of daily living.

The LTC rider has become a game-changer in the executive benefits marketplace — offered as GI, it provides both flexibility and added protection without additional underwriting requirements.

Beyond LTC, several riders commonly found in the individual market are also available in executive benefit plans, including:

Waiver of premium rider: Waives premium payments if the insured suffers a qualifying disability, ensuring the policy remains active during a period of income loss.

Paid-up additions rider: Allows the policyowner to purchase additional life insurance and build cash value by using policy dividends or additional premium payments — on a paid-up basis.

Accelerated benefits rider: Provides the insured with early access to a portion of the death benefit if diagnosed as terminally or chronically ill.

Index participation feature rider: Gives the policyholder the option to allocate a portion of their paid-up additions cash value toward receiving a dividend adjustment based on the S&P 500 Index performance — subject to caps and floors. This feature adds growth potential while preserving the guarantees of whole life. 

Seizing the moment

The executive benefits market is growing, and if businesses do not keep up, their top workers can be poached by rivals with better benefits packages.

For insurance professionals, this remains a wide-open opportunity. You don’t have to be the expert. That’s what strong relationships are for. When you team up with someone who specializes in executive benefits, you can move cases across the finish line and position yourself as the advisor who solves real business challenges.

The wisest advisors don’t wait for a person to have a $25 million problem like Moelis & Co. before they talk. Instead, they help their clients make plans.

The firms that prosper in the coming decade will be those that plan ahead, make sound plans and invest to retain their competent employees. The same goes for advisors.

Executive benefit planning does not constitute selling a policy — it is resolving real problems and establishing long-lasting relationships that are worthwhile for many years to come.

For those who want to enter this field, the $42 billion market chance is obvious. Now is the time to take it.

Milorad Markovic is director of life and disability insurance brokerage with Hunken Ewing Financial Group in Chicago. Contact him at [email protected].