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November 02, 2005 at 07:00 PM
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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.
