A New Twist On Golden Handcuffs

[lachjs789]

Corporations who have wanted to retain key execs have utilized the Golden Handcuffs concept through a substantial life insurance benefit as a means to achieve this goal.

Here is a new twist on that concept that utilizes some new product designs to offer a unique combination of benefits.

Case Study: Male, Age 50, PNS, 250K/yr Salary
Benefit: $250K Initial Death Benefit paid to the corp
$20k/month benefit paid to the heirs for 10yrs
Cost: $22K/yr guarantees the death benefit for life

The insured, who owns the contract, can elect to cancel the policy and receive all the premiums paid in years 15, 20 or 25 guaranteed.

The corp wanted to setup a salary continuation program for the exec's family in the event he passed away. They setup a simple 162 Executive Bonus program that allowed them to deduct the premium. They double bonused the exec to help him pay for any income taxes due on the first bonus.

This greatly enhances the corp's ability to retain this exec while offering a tax deductible benefit that provides some cost repayment to them and a tremendous benefit to the exec's family.

 

[Justin Bilyj]

So they are just giving him bonuses to cover tax liability of receiving income from the guaranteed premiums?

 

[LGilmore]

Not to be real douchy, but is one year's salary as a death benefit going to keep anybody around?

"$20k/month benefit paid to the heirs for 10yrs"

Is this a typo or are you going to make a 250k policy pay out 240k a year, for a decade? Could you show the math?

 

[lachjs789]

So they are just giving him bonuses to cover tax liability of receiving income from the guaranteed premiums?

The company is supplying the funds to buy the policy via additional income that is tax deductible to them and taxable to the exec. He then purchases the insurance with the additional compensation. The first bonus covers the premium and the second bonus covers the taxes owed on the first bonus.
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Not to be real douchy, but is one year's salary as a death benefit going to keep anybody around?

"$20k/month benefit paid to the heirs for 10yrs"

Is this a typo or are you going to make a 250k policy pay out 240k a year, for a decade? Could you show the math?

The lump sum death benefit on the contract is over 2.3M. We are paying out over the 10 years 2.65M. 250K to the corp and another 2.4M to the family over 10 years.

 

[scagnt83]

Not exactly a new twist.... death benefit salary continuation has been done before and will be done again.


I have found that salary continuation upon retirement is a much better retention incentive.


And for those premiums, you should be able to do better than an ROP option.


So, did you account for taxes on the DB going to the corp since they dont own the policy?

 

[lachjs789]

Not exactly a new twist.... death benefit salary continuation has been done before and will be done again.


I have found that salary continuation upon retirement is a much better retention incentive.


And for those premiums, you should be able to do better than an ROP option.


So, did you account for taxes on the DB going to the corp since they dont own the policy?

The twist is this can all be done via the contract, solved for and guaranteed at issue time without the need for additional documents specifying benefits. The ROP option is available to the insured if he wants to unwind the program as a surrender value only. The death benefit is over 2.3M if paid out in a lump sum. The premium is slightly below 22K/yr.

 

[BNTRS]

Umm, if you're establishing a 162 plan, there's additional paperwork needed, unless your insurance company comes with free legal service.

I can set them up with more than return of premium and 100% cash value from year 1.

The only thing that is new that I've noticed is that you've not fully recovered the company's cost of providing this benefit, which is a commonly very coveted feature to Executive Comp.

 

[scagnt83]

The twist is this can all be done via the contract, solved for and guaranteed at issue time without the need for additional documents specifying benefits. The ROP option is available to the insured if he wants to unwind the program as a surrender value only. The death benefit is over 2.3M if paid out in a lump sum. The premium is slightly below 22K/yr.

So you are telling me that a life insurance company has included wording for an executive bonus contract within a LI policy contract? ... does that include a top hat notice to send to the IRS to inform them of the plan?
Does that include proper employee consent forms?
Does the insurance company accept liability for the non insurance portion of the contract????

Is the contract language customizable? Most lawyers who draw these up customize the language for the specific needs of the situation.

And you never answered the tax question ... that's covered by the IRS, not the policy's contract. If its not owned by the corporation the DB is taxable to them as income. Which will mean they will recoup around 60% to 70% of premiums.

 

[lachjs789]

Umm, if you're establishing a 162 plan, there's additional paperwork needed, unless your insurance company comes with free legal service.

I can set them up with more than return of premium and 100% cash value from year 1.

The only thing that is new that I've noticed is that you've not fully recovered the company's cost of providing this benefit, which is a commonly very coveted feature to Executive Comp.

The cost to offer positive cash in year one would be signifcantly more than the one I outlined. Anything can be done if they want to lay out the cash.

Additionally,the cost to the company is not the full premium since they are taking a deduction for each bonus. The tax on the back end from the death benefit is often offset by the yearly deduction, depending upon how long they bonus out the premium.

The cost to setup a 162 is minimal since the plans are fairly straight forward. We are typically not implementing restrictive benefits because the company feels if they can retain a productive exec for the next 15 years that that pays for itself. They are most concerned with offering a guaranteed benefit to the exec's family at a minimal, predictive and guaranteed yearly cost.

 

[BNTRS]

The cost to offer positive cash in year one would be signifcantly more than the one I outlined. Anything can be done if they want to lay out the cash.

What are you talking about? The client doesn't pay the cost, the agent just takes a more spread out comp that is subject to a longer charge back schedule. It's pretty standard with Exec. Comp products. Personally I love the way those products pay, it stabilizes income year over year a little better, and prevents a huge tax hit to me.

Additionally,the cost to the company is not the full premium since they are taking a deduction for each bonus. The tax on the back end from the death benefit is often offset by the yearly deduction, depending upon how long they bonus out the premium.

Ok fine, but it's still an expense and they are only ending up with $250k taxable db. why not make the death benefit a reality and leave cash on their balance sheet? They tend to like doing that, in my experience anyway.

The cost to setup a 162 is minimal since the plans are fairly straight forward.

So first it was done automatically, and now it involves a minimal set up. I don't like ideas with asterisks.