Employer-sponsored life insurance has traditionally played an important role in an executive’s pre-retirement planning for family and financial obligations. A company can give its executives the opportunity to enhance their families’ financial security, both pre- and post-retirement, through ownership of individual life insurance policies.

It is believed that executives need life insurance benefits of five to seven times their income to be adequately insured. Traditionally, companies provide life insurance benefits through group term life. However, group term is usually phased out or canceled at retirement.

Alternatives to group term include the following:

Split Dollar Plan

  • Employer provides life insurance protection to the employee and gives the employee the right to designate a portion of the death proceeds to the beneficiary
  • Employer owns the policy, retains the policy cash values and determines who is eligible
  • Employer does not require IRS approval; however, there are other reporting requirements
  • Employee chooses the beneficiary who receives death benefit protection for a term cost that is income tax free

Group Carve-Out Plan

  • Provides permanent, portable death benefits with tax-deferred capital accumulation
  • Employer chooses the executive participants who then opt out of the group life plan
  • Employer provides the additional death benefit through one of several plan types (usually participants retain only that group term life coverage up to the non-taxable amount of $50,000)

Executive Bonus Plan

  • Gives executives the opportunity to purchase permanent life insurance with the employer’s help
  • Executive owns and names the beneficiary of the policy
  • Employer pays the executive a bonus, which the executive uses to pay the policy premiums
  • Employer deducts the bonus, and the executive pays tax on the bonus

Death Benefit Only Plan

  • Employer promises executives a pre- and post-retirement survivor benefit
  • Employer purchases and is the beneficiary of the corporate owned life insurance (COLI) policies on the executives
  • When an executive dies, the corporation pays survivor benefits from general assets and recovers costs from the policy death benefit