Producers Ringing Up EOLI Sales

Other observers echo this view, noting that because of compliance costs, deferred comp plans remain predominately the province of mid-size and large businesses that have the financial wherewithal and resources to support the arrangements. Small businesses tend to favor less regulated plans that are easier and more economical to implement.

Few business clients, irrespective of company size, seem much concerned about another federal restriction governing EOLI sales: IRC Section 101(j). Inserted as a provision within the Pension Protection Act of 2006, 101(j) stipulates that employers must provide notice to, and secure consent from, employees whose lives the companies are insuring. Business owners must also alert the IRS to the number of employees being insured and the maximum face amounts on the policies.

Chaffee describes the various reporting requirements as “basic,” noting that they essentially codify best practices that many carriers have long required of producers. “We don’t see [101(j)] as an impediment to continued EOLI sales,” he says, “In fact, the requirements have enhanced the comfort level among prospective buyers by confirming processes and safeguards that had been in place for many years.”

Regulations aside, sources say employer-owned life insurance remains a hot seller among businesses desiring to fund executive compensation plans because of the tax and other advantages the policies afford. At the death of an insured key executive, the employer (assuming the firm is designated as a beneficiary) receives the policy proceeds income-tax free. The employer can also take an interest deduction on moneys borrowed from insurance contracts to fulfill a plan’s financial obligations.

Policy cash values also grow tax-deferred. Additionally, experts note, the price of competitive EOLI contracts is generally cheaper and allows for greater cash value accumulation per dollar of death benefit in the early years of the policy’s life, than does an off-the-shelf, retail product.

“Employers are looking for ways to reduce insurance costs, increase savings and recover current benefit costs,” says Schiff. “EOLI offers all 3 benefits to the employer.”

And, he adds, it is a vehicle with which to recruit, reward and retain key executives–all primary objectives of the business. These benefits and the various tax advantages form powerful buying motives, all the more so in a contracting economy when companies can ill-afford to lose prized human capital. But to clinch the deal, sources say, advisors ultimately need to speak to the impact of the purchase on the bottom line.

“To be successful in the business market, advisors really need to address corporate finance needs,” says Parrish. “What closes the sale is the ability to show [EOLI's] net present value and internal rate of return. Producers have to demonstrate the financial reasons why insurance is an appropriate solution, as opposed to pitching the widows-and-orphans argument.”

Because of the financial focus, observers say, advisors also have to make their case to company principals who keep a vigilant watch on the balance sheet: chief executive officers and chief finance officers. Depending on the size of the business and the scope of the plan, other top execs may have to be included in the discussion, such as human resource directors. The producer will likely also need to consult with other advisors in crafting and securing approval for an EOLI-funded plan. Among them: the company attorney, tax accountant, benefits consultant and investment advisor.

Because of the various constituencies to be assuaged–parties that in some cases may be working at cross-purposes or have different priorities–the sales cycle can last from 6 to 18 months. During that time, the advisor will need to be prepared to address potential deal-killers, such as a change in management priorities, a worsening of the firm’s cash flow situation or the loss of the sale to a competitor. The chief stumbling in most cases, says Chaffee, is the advisor’s inability to explain why an EOLI-funded plan is superior to alternative solutions, such as mutual funds or discounted notes.

Given the hurdles, market-watchers strongly recommend that advisors lacking the requisite expertise team up with financial professionals well-versed in business and executive compensation planning. They should also align themselves with carriers and third parties that can provide the resources–advanced markets experts, technology, training, marketing and plan administration services–needed to maintain a practice in the corporate arena.

Not least, they need to maintain high ethical standards–however great the temptation to do otherwise. Says Parrish: “Greed has no place in this market space. Business owners simply won’t put up with advisors who are prone to selling policies for which the face amount or commission is greater than justified. The product absolutely has to fit the need.”