Executive Bonus Plans Using Life Insurance to Fund Retirement

Have you ever heard of anyone using life insurance to fund retirement?

Well it’s an awesome strategy which can be used by business owners as a tool to create executive bonus plans that will attract the best talent in the market.

As we all know it’s not possible to push your company to the top of the heap without fabulous employees who’ll stick with you through thick and thin.

Savvy business owners offer vital employees attractive retirement and executive bonus plans to entice top candidates to sign up and stay on board.

So I’m going to share an industry secret. Did you know many, many business owners use life insurance to create these valuable executive bonus plans?

YEP! They sure do. Let me explain…

Long ago savvy business owners realized that using life insurance plans to fund retirement is SMART. Policies can be used to create very lucrative retirement and executive bonus plans.

…AND they’re affordable, flexible & attractive to job hunters.

So I am going to walk you through the deets…

Or if you like, click on the links below to get some quick & easy answers!

Quick Guide

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The numbers speak volumes:

The Newport Group Survey: Using Life Insurance to Fund Retirement and Executive Bonus Plans

A recent survey performed by the Newport Group found the following

  1. 7 out of 10 businesses use life insurance policies to provide funding for non-qualified deferred compensation (NQDCP) packages and to supplement executive retirement plan (SERPs).
  2. 95% of those that participated, offer NQDCP Packages as the most common executive bonus plans for their top executives!
  3. 82% of the companies surveyed use life insurance to fund their SERP packages. SERPs are also known as top hat plans. They provide benefits above and beyond those covered in retirement plans such IRAs, 401ks or NQDCPs.
  4. As many as 73% of those surveyed also use COLI ( Company-Owned Life Insurance) or Employer Owned Life Insurance (EOLI). Permanent life insurance policies, such as Variable, Universal, Universal Indexed and Whole Life are used to structure these plans.

Wow! Now that’s a statement. If so many companies are using life insurance to fund retirement via executive bonus plans, then there must be something to it!

Let’s face it! The economy is NOT what it used to be.

Which means that people are thinking about their retirement now more than EVER.

Did you know: ​

US salary increase budgets for 2016 have a median increase of 3.00 percent, the same percentage as the previous six years. Projections for 2017 are also 3.00 percent. The Conference Board

That’s why creative strategies NEED to be considered by employers looking for the best talent.

….and executive bonus plans may just be the enticement you need to get the people you want! ​

Types of Executive Bonus and Retirement Plans

There are three strategies that are typically implemented to use life insurance for retirement in executive bonus plans.

Let’s check ’em out now! ​

Non Qualified Executive Bonus Plans

  • Be sure the policy is portable or the employee retains ownership (EOLI) – some are owned by the corporations (COLI)
  • ​Death benefits are tax free
  • Cash value can be used to supplement retirement income
  • Executive bonuses aren’t subject to annual reporting. No admin fees
  • Income tax liability can be met by withdrawing or borrowing cash value or using the policy dividend through bonus or double bonus paid by employer

Split Dollar Compensation Plans

  • Provides estate liquidity. Can be created to avoid federal estate tax
  • Employer may help shareholders through contributions to the cost of premiums through a cross purchase buyout agreement
  • Uses permanent policies such as universal, indexed universal & whole life
  • If employee is in a lower tax bracket – can use as tax leverage & employer can pay non-deductible premiums to lower the cost

Deferred Compensation Plans

NON QUALIFIED PLANS

  • Employers can reward employee performance
  • Exempt from ARISSA Title 1
  • Relaxed compliance and admin fees​

UNFUNDED PLAN​

  • Unsecured promise to pay benefits in the future (unprotected from creditors)

FUNDED PLAN

  • Specific assets set aside (protected from creditors)

Non Qualified Executive Bonus Plans

executive bonus planExecutive Bonus Plans solely benefit the employee.

When an employer uses life insurance to fund retirement, the company typically applies for a policy and retains ownership in the name of the employee.

The cash bonus or premium is reported on a W-2 as compensation.

The employer can also pay the employee an additional bonus to fund the increased taxes that may result from the compensation plan.

As the cash value of the policy builds, it will eventually grow to such an extent where dividends are paid out to the executive. At this point many companies stop paying the additional bonus to offset taxes.

The executive can also borrow against the cash value to offset taxes, although doing so will result in a reduction of death benefits.

The Pros of Non Qualified Executive Bonus Plans for the Employee

There are some great perks for employees who are offered nonqualified executive bonus plans.

These schemes circumvent the limits placed by the government on highly compensated people from a tax perspective.

Not to mention the cash value growth, which the employee may use for retirement, also benefits from tax deferment. In the meantime, the employee can also take out loans, income tax free, for as long as the policy is in force.

…and of course there are the standard death benefits that your beneficiary will inherit upon death.

Things to Consider if You Are an Employee:

You really need to know all the details when it comes to your employee bonus plan. Take some time to sit down and read the fine print.

You may be liable for additional taxes if your employer doesn’t assume 100% of the burden. You also want to ascertain who holds the policy.

If it’s the employer, it means that the policy is not portable and your continued participation is reliant on staying with the company. Non Qualified Executive Bonus Plans owned by the employee are called EOLIs and Corporate owned are COLIs.

Lastly, everything hinges on your insurability. If you aren’t insurable this is all a moot point.

Why Should You as a Business Owner Offer Non Qualified Executive Bonus Plans?

There are many, many reasons that an employer should offer executive plans like these.

It’s a great way to motivate potential employees to perform better or stay with you long term.

If you’re a business owner I would highly recommend these tools to get the best possible people on your team.

There are also some very good tax reasons for employers to offer Non Qualified Executive Bonus Plans, unlike Non Qualified Deferred Compensation Plans, the company, can take a tax deduction for amount of the bonus immediately.

Unlike other packages, the company can pick and choose who they decide to benefit and there’s also a great deal of flexibility in how an executive bonus plan can be structured. Not to mention that everything is confidential. The details don’t have to be disclosed, which means other employees won’t know the ins and outs of the deal. This is very appealing!

…but the highlight for me is that the plans are also very affordable. It’s truly a win-win.

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Split Dollar Compensation Plan

The Split Dollar compensation plan is a strategy where a life insurance policy is purchased and the premiums and policy benefits are divided in a predetermined manner.

A split dollar can be set up where both the premiums and the proceeds are split between the employee and the employer.

That being said, if the employer has deeper pockets, they can opt to pay the full premium.

Typically, split dollar plans designate the employee as the named insured on the policy.

Sample Policy Design for a Key Employee

For example, ABC Company’s top salesperson, Jennifer, is a key employee. They simple can’t afford to lose her.  If she were to be lured away to another company or were to die unexpectedly, ABC Company would be in trouble.

Jennifer doesn’t have life insurance because she has a pre-existing condition.

When she applied for life insurance, she decided against paying the $200 premium per month for $500,000 of coverage.

Solution

ABC Company applies for a $1,000,000 policy that costs $400 per month.  ABC Company agrees to pay $300 per month if Jennifer pays the remaining $100 per month.  In exchange, Jennifer’s husband will be named 50% beneficiary on the policy, receiving $500,000 in the event of her passing, while ABC Company would retain the rest of the death benefit.

ABC Company has mitigated their risk in the following ways:

  1. Jennifer is more likely to stay with ABC Company as she is receiving a valuable benefit, 50% savings on life insurance.  If the policy has cash value, she may also be eligible to accumulate some savings in the policy, further enhancing the benefit.
  2. If Jennifer passed away, ABC Company would receive $500,000, helping with the cost of replacing Jennifer and the potential hit from lost sales.

This is an ideal compensation package and incentive for employees, especially if the company does not have a Group Life Insurance plan in place.

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HEALTH ISSUES?  WE’LL HELP GET YOU APPROVED!

At Huntley Wealth, we specialize in helping individuals with high risk medical issues.  You name it, and we’ve seen it. We’ll help you get approved quickly at a rate you can afford.  Get started with a free life insurance quote now!

Get a Quote!

Deferred Compensation Plans

Another approach that an employer may take when using life insurance to fund retirement plans, is to defer compensation.

Let’s check out this strategy now!

Non-Qualified Deferred Compensation Plan

A NQDCP is a contractual agreement between employee (or an independent contractor) and employer to pay the employee sometime in the future.

These plans don’t have the same tax benefits as qualified plans, BUT..

…when they are properly executed, taxation can be deferred until benefits are paid at some point in the future.

Because they’re nonqualified, NQDCs don’t have to be pre-approved by the IRS.

Keep in mind that any compensation arrangements made must satisfy applicable IRS requirements.

Most NQDCPs Are Unfunded Plans

Most NQDCPs are unfunded.

If the employer funds the plan, taxes will be imposed immediately.

When an unfunded plan is offered, the employee only has an unsecured promise to receive benefits in the future.

Even the simple act of setting money aside triggers income tax, despite the fact that the employee doesn’t have access to the funds.

There’s a lot of risk attached to these sort of monetary plans, as the employee basically becomes a creditor.

Taxes are deferred until the monies are eventually paid out. Then the employee will have to satisfy Uncle Sam.

A plan is considered unfunded if:

  1. A reserve is set aside to pay promised benefits, or they remain as a general asset, subject to access by the corporation’s general creditors
  2. The employee has no current beneficial interest in any set aside funds

Funded Plans

As I mentioned most NQDCPs are unfunded.

However there are a 2 exceptions:

  1. Supplemental Executive Retirement Plans (SERPs)– which are similar to pension plans, giving the employee benefits upon retirement.
  2. Corporate Owned Life Insurance (COLIs) – the company purchases a policy and pays out the benefits upon retirement.

A plan is considered funded when:

  • The employer sets aside specific assets to meet its future obligations, with the employee as beneficiary
  • These assets are not accessible from general creditors

Funds are kept in the general asset reserve, as required by GAAP. The employer will work out all the details regarding distribution, vesting and forfeiture.

Retirement is a VERY important consideration for us all.

….but especially in 2017!

The facts below are pretty hard to believe: ​

All your retirement dreams can come true, just maybe not in the U.S. Among the leading nations for retirement security, the United States didn’t even crack the top 15, according to the 2017 Global Retirement Index by Natixis Global Asset Management.

The US is losing ground when it comes to retirement security – CNBC.com

With this in mind using life insurance to fund retirement with Executive Bonus Plans makes some SERIOUS sense.

Using Life Insurance to Fund Retirement Through Executive Bonus Plans Is a GREAT Strategy!

So as you can see using life insurance to fund retirement can be achieved through create executive bonus plans that include three primary strategies:

  • Non Qualified Executive Bonus Plans
  • Split Dollar Compensation Plans
  • Deferred Compensation Plans

If you are a top level executive or an owner of a company, I highly suggest looking into these very exciting plans. They can help you keep the taxman at bay, plan for retirement and assure a solid foundation for your financial future.

….Contact Huntley Wealth Today! We Can Walk You Through Your Options!

Are you an employer looking to set up Executive Bonus plans for key employees?

Well as you probably have noticed, it’s not the most straightforward process. There are so many options available and you need a solid understanding of the types of life insurance used to set up these strategies.

Give us a call today and you can speak to someone who knows all the ins and outs!

…or maybe you’ve just been offered a perk and want to make sure you are covered the way you want to be. I’d be happy to answer any questions you have.

Call 888-603-2876 today!

*While we make every effort to keep our site updated, please be aware that “timely” information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Huntley Wealth & Insurance Services and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser.