Finding The Right Insurance-Based Executive Comp Plan For Your Client
“Have I got a deal for you!” These are words we hope are not used very frequently when a life underwriter first discusses executive benefit plans with a business owner.
Although a benefit arrangement might fit the clients needs perfectly, this is often determined only after some extensive probing, corporate soul searching, and plan comparisons. The life underwriter, so often the catalyst in the process, should be able to streamline the decision-making by directing the client away from inappropriate solutions and toward ones that more closely match the corporate goals and objectives.
Determining the best possible benefit program may be compared to the process a doctor uses to diagnose an illness. The doctor has a universe of diseases and known illnesses and must eliminate those that couldnt or shouldnt apply. The patients symptoms are the best indicators and yet family history, diet, medications, and even psychological factors may all be involved.
A doctors training and experience guides him in regard to the order in which to consider the facts. The physician will often have follow-up questions or require further testing along the way. The process is one of elimination, as whole categories of illnesses are discarded from consideration.
We should be grateful that, unlike medicine, executive benefit planning is generally done without having our clients lives on the line. Even so, we recognize that successful executive benefit planning results in financial well-being and peace of mind for the participants and employer.
The life underwriter has a reasonably small universe of planning solutions to recommend to the employer interested in life insurance based executive compensation arrangements. The major categories include: deferred compensation, Section 162 bonus arrangements, split-dollar plans, group term insurance carve-outs, and Section 419 welfare benefit plans.
Within any of these categories we find variations or subtypes. In regard to deferred compensation, for instance, there are traditional salary deferral arrangements, supplemental executive retirement plans (SERPs), 401(k) mirror plans, phantom stock plans, etc. In addition, we find variations of the subtypes when we factor-in vesting schedules, matching employer contributions, and choices of funding vehicles.
The first step in assisting the business owner in choosing the “right” executive benefit plan is accurately capturing the companys objectives, goals, and pertinent factual data. Some of the insurance industrys client questionnaires do a good job of organizing the information, but unless one understands why the questions are being asked, it is difficult to determine the appropriate follow-up questions or to whom they should be directed.
For instance, why is it important to know if the business is a pass-through entity for tax purposes? The answer is that in many cases, arrangements such as deferred compensation and split dollar may lose their economic viability for the owners of pass-through entities since there is no corporate tax bracket to leverage. However, it would be wrong to state that deferred compensation and split dollar are always inappropriate for companies that are not “C” corporations.
More information is needed to determine if the owners are either to be excluded from the plan or if there is an overriding reason to include them.
The elimination process needs to start with information that can remove broad planning categories and then zero in on specific design elements.
I suggest examining the companys objectives first, followed by their individual goals or preferences, and finally the pertinent factual data. This order should help streamline the decision process. Capturing incomplete information in any of the three areas could result in an inappropriate recommendation.
This discussion may seem esoteric for those planners who are successful in using a yellow pad approach and listening carefully while their clients answer several open-ended questions. In fact, these planners may instinctively capture the proper information as they ask their follow-up questions.