With the chill on equity split dollar, new ways of funding benefits are emerging

By Warren S. Hersch

As the economy rebounds, more small businesses are eyeing executive benefits to attract, reward and retain their key employees. In the wake of new regulations, many firms are turning to executive bonuses.

Yet, with approximately 50% of small businesses saying they’re still without a plan, the market remains underserved. Boosting market penetration, say experts contacted by National Underwriter, will require of producers a heightened focus on up-selling to existing clients and more education and field training. Some also suggest that a willingness to accept reduced commissions could make benefit packages more attractive.

Producers say the current high demand for executive bonuses stems, in part, from the declining fortunes of a once-favored package: equity split-dollar plans.

“With the new [IRS] regulations in force, we’re seeing a move from split dollar toward executive bonus plans,” says David Remstead, vice president of specialty markets for the Life Product Department at Northwestern Mutual Life Insurance Co., Milwaukee, Wis. “This represents a shift in the mix.”

Adds Brian Titus, an advanced planning attorney and second vice president for The Phoenix Companies, Hartford, Conn., “The current regulations have definitely chilled the market for [equity] split dollar, which was by far the most popular split-dollar plan among small business owners. The industry will have to figure out ways to use it going forward.”

As with other split-dollar plans, the employer and key employee share in the cost of an insurance policy. But equity split-dollar plans give the executive an interest in the cash value of the life policy once the cash value exceeds the employer’s cumulative premiums.

The plans are now less utilized because new IRS regulations issued earlier this year treat corporate contributions to the insurance premiums as a loan. Previously, they were viewed as an economic benefit.

Upshot: The plans are less attractive to key employees because interest on the loans increase (as in the case of an estate plan) employees imputed and taxable income. As an economic benefit, employees paid a reduced term insurance charge.

Under the bonus plan, the employee owns the life policy, but the business owner pays part or the entire premium to the insurance company.

Unlike supplemental life insurance for key employees in, say, a deferred comp plan, the policyholder keeps the policyand its tax-deferred cash valuewhen he or she leaves the company. Premiums are tax deductible to the business but taxable income for the key employee.

A report to be released this summer by LIMRA International, Windsor, Conn., concludes that executive bonuses are the most widely adopted of executive benefits within small and medium-size businesses with from 10 to 1,000 employees. Of 800 firms polled for the study, 66% said they offer executive bonus plans.

Titus says that bonus plans especially make sense for LLCs and S Corps, which do not enjoy the tax-favored treatment of deferred comp plans.

The next most popular options for key employees cited in the LIMRA study were life insurance plans (51%), group health or medical plans (39%), and stock option plans (28%). Voluntary deferred compensation programs (25%) and supplemental executive retirement plans (15%) also figured prominently in survey responses.

“We’re seeing a lot of interest in deferred compensation programs, as well as supplemental individual disability and cash-based incentive programs,” says Steve Karp, a senior managing consultant at Mullin Consulting, Los Angeles, Calif.

Some producers still find split-dollar arrangements (if not the equity variety) to be big sellers. Don Bacque, an agent with Massachusetts Mutual Life Insurance Company, frequently incorporates split-dollar death benefits into SERPs for his clients, family-owned businesses with a few key non-family managers.

An employer participating in a SERP buys an insurance policy on a covered executive. The company, as policy owner, typically pays both a retirement benefit and a survivor/death benefit for a named beneficiary (should the executive die prior to retirement).

Retirement benefits for the executive (or plan participant) and the death benefit for the named beneficiary are tax deductible for the employer. SERPs are also attractive because they allow business owners to vary benefit levels with earnings.

“We design our plans so there?s no requirement for ongoing contributions,” says Bacque. “The SERP?s profit-sharing focus, wherein the owner puts in a lot of money during a good year and little or no money during a bad year, makes the sale more palatable.”

Bacque?s approachlending flexibility to the executive benefit plan by linking it to performance-based benchmarksis catching on in the insurance industry, say producers. And that could prove key to achieving a higher penetration of a still-underserved small business market.

Fifty-percent of the small businesses polled in the LIMRA study reported having no executive benefits. And one-half of the have-nots have never been contacted by a financial advisor.

The crucial factor separating companies with plans from those without was size: Firms with fewer than 50 employees were least likely to have a plan for key execs, according to the report.

Cheryl Retzloff, a senior scientist at LIMRA and the report’s author, says marketing an attractive package to small business prospects is all well and good, but producers could make their jobs a lot easier simply by tapping their existing small business clients more of the time for cross-selling and up-selling opportunities.

“Producers need to know that 25% of their clients are saying they will buy again in the next 12 months,” says Retzloff. “And 38% of companies that previously were contacted but rejected a plan because it wasn’t the right time say they would buy in the future. These folks are the best prospects.”

Beefed up education and field training, say observers, would help producers more effectively market to these businesses. To that end, many insurance carriers, such as Northwestern Mutual, offer seminars on executive benefit and advanced market sales.

Advisors also point to The American College, the National Association of Insurance and Financial Advisors, the Association for Advanced Life Underwriting and the American Council of Life Insurers as key educational resources. These organizations also apprise members of legislative activity impacting the insurance business including efforts they are undertaking to kill or modify bills deemed harmful to the field and product innovation.

One example is recent legislative activity in the U.S. Congress regarding corporate-owned life insurance.

“The thing we’re worried about most is [COLI] legislation that adversely impacts the small business plans we deal with,” says Titus.

“We have many brilliant people in the life insurance business who have discovered cutting-edge ways of using life insurance products,” says Bacque. “Unfortunately, much of the current federal and state activity can be attributed to bureaucrats who don’t understand our business, yet believe we’re using products to enrich their companies and their top officers.

“In fact,” he adds, “we’re providing an [executive] benefit and using life insurance to recapture the cost of providing the benefit.”

Harmful legislation aside, Bacque says the industry could boost sales of executive benefit packages by voluntarily lowering commissions from the current 20% to 25% fee range to 15% to 20%.


Reproduced from National Underwriter Edition, June 11, 2004. Copyright 2004 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.