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As spiraling health care costs consume an increasingly larger slice of every company’s benefit pie, employers are more intent than ever on maximizing the value and impact of their benefits while minimizing the cost.
Benefit offerings that serve “double duty”==by solving 2 problems at once-are especially desirable tools for strengthening a company’s competitive positioning in the all-important race to attract and retain the best and brightest executives.
An executive group life carve-out program is one such “double duty beauty,” providing key executives with enhanced, permanent life insurance that does double duty as a potential tax-efficient savings vehicle.
And make no mistake about it: Saving==and saving for retirement in particular==remains a challenge for many executives because of restrictions on qualified plans. For example, an employee earning $50,000 per year could potentially contribute 28% of his income (the $14,000 maximum allowed by law, if the plan permits) to his 401(k) plan.
In contrast, a key executive earning $150,000 per year could contribute only 9% of his income by maxing out at $14,000.
An executive group term carve-out program can help address this issue by working on 2 fronts. Highly compensated employees are “carved out” of the company’s group term life plan and provided with a group life insurance program that generally offers higher face amounts and permanent coverage, and other benefits, such as the potential for tax-efficient savings that will help eligible employees prepare for future financial obligations.
At most carve-out plans, the employer pays enough premiums to cover the cost of the group universal life or group variable universal life insurance, as the employer does for a group term life plan. In more generous arrangements, structured under a 162 Bonus Plan between the employer and executives, the employer can help increase the certificate values for key executives by providing them with bonuses that cover their costs.
Either way, there are many attractive features that appeal to highly-compensated employees. For example, an executive can:
o Save for future life events such as retirement. The plan may offer tax-deferred investment opportunities because certificate values grow tax-deferred while they remain in the contract. Executives trying to save for retirement who are limited in the amounts they can contribute to their qualified plans find this savings feature particularly attractive.
o Undertake long-term financial planning. Because of the plan’s portability, an executive can continue their insurance after their employment has terminated, unlike with deferred compensation plans or other benefits.
o Invest in a wide range of funds that take into account various levels of risk tolerance.
o Transfer funds and change allocations within the certificate without creating a taxable event.
o Stop paying voluntary premiums and let the account value grow tax-deferred, using the account value and future growth to pay the cost of insurance charges after retirement while keeping the death benefit in force. (Participants need to monitor this option closely to ensure that there is always sufficient cash value to cover the future cost of insurance charges.)
o Access to account value in an amount equal to all premiums paid by both the employer and employee before income taxes kick in.
The last point is significant. 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 when determining the amount of cash withdrawals that can be made from the certificate without incurring income tax. So, at retirement, executives can withdraw==before incurring any income taxes==an amount equal to their premium payments plus their employer’s premium payments made on their behalf for the cost of insurance.
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% tax penalty. If an increasing death benefit option is selected, any account value is added to the face amount and passed to the beneficiary as a part of the income-tax-free death benefit.
The bottom line is that a well-designed executive group carve-out plan can give executives better insurance coverage in a more efficient manner than an ordinary group term plan can. The employer, meanwhile, gets a benefit that can be cost-effective, does double duty as a life insurance benefit and as a savings vehicle, and ultimately enriches the benefits suite, making it a more powerful tool for recruitment and retention.
Of course, keep in mind that the information contained in this article is not written or intended as tax or legal advice. Readers should not rely on the information in this article to help them avoid any federal tax penalties. Readers interested in the tax aspects of GVUL plans should seek advice from independent tax and legal advisors.
In addition, before employees participate in a variable life insurance contract, those employees should read the plan prospectus carefully and carefully consider the investment objectives, risks, charges and expenses of the variable life contract and its underlying investment choices.
John Laprade is managing director of executive group life sales at MassMutual Financial Group, Springfield, Mass. He can be reached at [email protected]
Ways A Carve-Out Plan Can Increase Executives’ Options
Executives usually can:
- Take the plans with them when they leave.
- Invest in a wide range of investment options.
- Transfer assets between investment options without creating a taxable event.
- Stop paying voluntary premiums and let investment earnings drive any increase in account value.