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.
For instance, the open-ended questions may start with one aimed at determining the clients main objective: “Please tell me what youd like to accomplish.” This statement will likely uncover whether the objective is to provide a “golden handcuff” arrangement, a “golden parachute,” supplemental retirement, or simply an attempt to bring the executive compensation package up to the level of the companys competition. The clients response often eliminates one or more of the solution categories.
The planners follow-up questions may capture the specific goals and help to further eliminate certain arrangements from consideration. Some typical follow up questions might include those found in Figure 1.
In some cases the companys goals are incompatible with one another as the client strives for the “have-your-cake-and-eat-it-too” plan. This may require the planner to request that the client rank the goals in order of priority.
The pertinent factual data will either eliminate solutions or better define the nature of the recommendation. In any case, the data needs to be as complete as possible since some questions may be vital to the analysis. Figure 2 has some examples of factual questions planners should ask.
I was once asked by a life underwriter as to which 3-4 questions he should use if he only had a few minutes with a prospect to discuss a new executive compensation plan. I responded that he might get the most mileage out of those found in Figure 3.
However, I warned him that the discussion that followed would only give him enough information to prepare for a solid second meeting. It would narrow the field of possibilities, help him determine the appropriate marketing materials to bring to the meeting and allow him to prepare the proper follow-up questions.
Once all of the information is at hand, the planner is ready to sort and eliminate possibilities. If the main company objective is to retain talented executives, almost any benefit provided by the employer helps, but executives may perceive some benefits as more valuable than others. Obviously, an employer-sponsored SERP with retirement, disability, and death benefits would be more attractive to an executive than a salary reduction savings plan with no company match.
A look at the companys specific goals might help us pick an appropriate benefit category from the list. If the employer is interested primarily in a retirement benefit and death protection is secondary, Section 419 plans and Section 162 bonus arrangements drop off of the list. The SERP will stay at the top of the list.
A goal to have the plan overlay or supplement the companys 401(k) plan would indicate that the recommendation should include a salary deferral feature with a possible company match.
Finally, a review of the pertinent company data may disclose that the business is a pass-through entity and that one or more of the executives are nearing retirement or are uninsurable. This information will be vital as far as picking the participants and determining the proper funding of the plan.
A 401(k) overlay plan may be established with owners excluded. In addition, informal insurance funding may be done on an “aggregate” basis in order to choose the insureds and level of coverage that result in the most cost efficient plan for the employer.
Executive benefit planning is one of the most rewarding segments of the life insurance and investment marketplace. Those who approach it in an organized and professional manner will develop the expertise needed to provide the proper recommendations to their clients.
, JD, CLU is director, advanced sales, for Penn Mutual Life Insurance Company, Horsham, Pa. He can be reached via e-mail at kirchner.ted@
Reproduced from National Underwriter Life & Health/Financial Services Edition, June 24, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.