Opening Doors With Executive Carve-Out

–Many plans allow participants to pay premiums that accumulate on a tax-deferred basis while in the contract.

Executives generally can recover through surrenders and withdrawals up to the amount of all employer- and employee-paid premiums, before incurring any income taxes. (See note below.)

The last point is significant. The employer premiums paid to cover the cost of life insurance protection are treated as cost basis when determining the amount of cash withdrawals that can be made from the certificate without incurring income tax. Under a traditional group term life program, participants cannot accumulate cash value in the contract or pay additional premiums. Thus, the value of the premiums paid by the employer under a group term life program provides only a death benefit.

Under a group carve-out plan, however, participants may pay voluntary premium payments. The premiums paid by the employer to cover the cost of life insurance are combined with the executive’s voluntary premiums and treated as cost basis. So executives who pay voluntary premiums benefit at retirement when they can withdraw up to the total amount of premiums (those paid by the employer and employee) before incurring any income tax liability. (Note: If the contract is a modified endowment contract, withdrawals and loans are taxable to the extent of gain, and may be subject to a 10% federal income tax penalty.)

Executives and highly compensated employees benefit the most from group life carve out-plans as they usually have disposable income to pay voluntary premiums and are looking for ways to supplement their 401(k) and other savings and retirement plans to accumulate funds on a tax-favored basis. The combination of the need for life insurance, which in most cases is already employer-paid, combined with the executive’s need for additional tax-deferred savings make executive group carve-out plans very attractive for both the executive and employer.

Producers selling executive carve-out plans know there are many opportunities to work with both the employer and employee. The relationship established in the group term carve-out sale has helped many producers achieve additional success with employers marketing other executive benefits such as executive disability income carve-out plans and long term care coverage.

Success is not limited to working with only the employer. Many producers have experienced significant increases in both individual sales and sales of other ancillary products as a result of the relationships formed through the executive carve-out. With group term carve-out, producers can maximize a cross-selling opportunity with an existing customer and employers get an affordable benefit that contributes to key employee retention. Getting access to key executives is very beneficial to producers and the carve-out sale may just be the best place to start.

is managing director, GVUL sales, large corporate markets, with Massachusetts Mutual Life Insurance Company, Springfield, Mass. He can be reached via e-mail at [email protected].

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.