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Life Insurance and mutual funds are popular funding vehicles for deferred compensation plans. The employee’s deferred funds are used to pay premiums on an insurance policy or into a mutual fund. At retirement, the cash values can be used as supplemental income. If the employee should die prior to retirement, the stated beneficiary will receive the policy proceeds. A nonqualified deferred compensation plan allows a company to selectively choose who may participate and on what basis.
Split Dollar Plans
A Split Dollar Plan is an arrangement between you as an employer and a select key employee to join in the purchase of permanent life insurance. Policy premiums, death benefits and sometimes cash values are divided-or "split"-between the two in accordance with the needs and objectives of each.
Split Dollar Plans may have a variety of designs but they generally fall under one of two categories based on policy ownership:
- Economic Benefit Regime-- In these plans the employer is the primary policy owner and the key employee's interest in the policy is typically limited to death benefit coverage. The death protection is an "economic benefit" with a value based on a government term insurance table. The value of the economic benefit is charged annually as income to the employee (unless the employee has paid for the benefit). At retirement the arrangement may be terminated and the policy surrendered by the employer or transferred as a bonus to the employee.
- Loan Regime -- In a Loan Regime plan the employee or a selected third party is the primary owner of the policy. The employer's premium advances are considered to be loans to the employee. The policy cash values become collateral for the repayment of the premium loans. Loan interest is either paid by the employee or reported by the employee as imputed income.
Disability Overhead Expense
Disability Overhead Expense Insurance is a reimbursement plan to cover business expenses during the total or partial disability of a professional or business owner.
Buy/Sell Insurance
Provides the financial means to satisfy the provisions of a buy/sell agreement upon the death (or sometimes disability) of a shareholder or partner.
Key Person Insurance
Companies that depend on a few “Key People” to generate a large portion of the company’s revenue or perform specialized duties, may need this type of protection. A Key Person policy can help avoid a business disruption due to the unexpected death of owners or other employees vital to success. The insurance is owned by and payable to the business.
