Life insurance distributions that can be used for tax-favored supplemental retirement income;
Portable income benefits; and
Permanent solutions for personal life insurance planning needs.
When considering group carve-out plans, the advisor should demonstrate to the employer both the upside of key executive staff retention and the potential for reduced group costs. In some situations, the savings realized by removing the highest paid executives can be used to fund significant individual compensation arrangements.
Small business owners who are restricted in building their own retirement plans also can benefit from group carve-out plans.
To illustrate these benefits, consider the case of a company with more than 200 employees and 17 key executives ranging in age from 32 to 60. To control the escalating cost of group benefits and to enhance its executive benefit program, the firm leverages a Section 162 executive bonus plan with a restricted access bonus agreement (RABA).
Under this arrangement, employees pay taxes on the premiums when they are paid but agree to restrictions on access to policy values or surrender without the employer’s consent. These restrictions can be for a period of years or, more commonly, until the executives retirement.
The plan incorporates death benefits for the older employees and supplemental retirement benefits for executives under 50. The plan is funded with a 10-year guarantee term product and a variable universal life plan with a short-term death benefit guarantee.
The plan provides $600,000 of individual death benefit coverage as well as $50,000 in group coverage for the 17 key employees. This reduction in group coverage results in a savings of nearly 35% for the group life employee program, which is subsequently used to fund higher permanent benefits.
See the chart for a representation of the key considerations in this case.
There are various ways to design and fund a group carve-out insurance plan. In the above case, the company used a single bonus (bonus of premium only to the executive). However, double bonus (bonus of premium plus tax due on bonus) plans also can be used to eliminate out-of-pocket costs to the executive.
A third option is to fund with split-dollar arrangements, including loan regime or economic benefit split dollar. Moreover, the addition of guarantee issue and simplified issue underwriting programs can further enhance the attractiveness of the permanent arrangements.
Other sales opportunities may present themselves when reviewing high levels of voluntary group coverage for key executives. In some cases, the creative use of term and VUL or UL insurance products can be cost effective and help meet other financial goals.
The overall goal in the small business market is to bring an idea to the table. Group life carve-out may not always be the solution, but it can open up opportunities for other cross-selling opportunities.
Maureen A. Baxter, CLU, ChFC, is assistant vice president, advanced sales and case design at Jefferson Pilot Financial. You can e-mail her at [email protected].
Reproduced from National Underwriter Edition, September 9, 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.