Clients needs a keyman insurance policy

[Zmurre]

I am confused so basically if someone wants to get insurance on a few employees, and pastors of the church. Would i do a whole life or term life?

 

[scagnt83]

I am confused so basically if someone wants to get insurance on a few employees, and pastors of the church. Would i do a whole life or term life?

What is the purpose of the policies?

If all they want is insurance to protect the church from a loss, then just go with Term.

 

[scagnt83]

Question: Company buys a no lapse UL for a key man policy on a 45 year old with agreement to give policy to insured upon retirement at 65. What determine the taxability of the benefit conferred upon that individual when they receive the policy and continue the premiums at retirement?

This would be the same as the Term policy technically.
(assuming there is no CV or the CV is lower than premiums paid)

However, that would be a "fringe retirement benefit" for a key employee. And often in these situations, employers will also give the retiree a bonus of some kind to help cover taxes. Just depends on how rich of a benefit they want to give or are able to give.

 

[Zmurre]

I meet today to get further details. I will update you all shortly!

 

[scagnt83]

I meet today to get further details. I will update you all shortly!

Ask about their goals for the policies and intended purposes. The more questions you ask about what they want to accomplish, how they want to accomplish it, and how much they can afford to accomplish it; the better position you will be to provide the right solution.

 

[Zmurre]

Got it. Any additional questions you can think of to ask?

 

[scagnt83]

Got it. Any additional questions you can think of to ask?

One question I often ask is "what spurred this decision to get insurance?". And that applies to non-business cases as well. Let them talk until finished. Then ask probing questions based on their comments.

You could also ask about any existing policies. They could be a replacement opportunity. But you can also look at that carrier first to see if its a good fit... then all policies can be on a list bill which makes admin much easier for the company.

Of course ask UW questions about employees to be insured.

 

[Robert Barney]

You guys are confusing different types of planning here.

This benefit is to protect the business, not employee.

That is my understanding of key man insurance. The company is putting insurance on a key person because if that person dies, the company will encounter financial loss until they can replace and TRAIN the new employee to do what the previous employee did.

It is rare for an employee to receive a Key-Man policy upon severing service early.

If a severance is amicable, and the policy has value (ie. last 20 years of a 30 year term plan) then the employee might like to have it and the employer will have no need for it and won't be continuing with it anyway.

On to Roberts question about the 30y term, it all depends on the set-up of the policy:

If employee gets partial benefit while employed (if their fam gets a % of DB):
Then employee is taxed annually for the portion of premiums that fund their % of the DB.

Why would anyone set up a key man policy to pay benefits outside the company? Assume the answer is NEVER.

If the same policy is transferred to employee upon severance,

then employee is taxed for the other portion of premiums that funded the remaining DB in prior years. (and is obviously on the hook for paying future premiums)

I understand they are on the hook for paying the rest of the premiums to continue the policy, but why should the employee be taxed for premiums for insurance coverage that is in the rear view mirror. I can't even begin to fathom why that would be the case. Had the employee died in those previous years, the company would have gotten the death benefit and there would have been no financial benefit to the employee.

Generally speaking, key-man policies that are pure risk management, are usually not offered to employees as a portable option upon early severance. Sometimes they can be included in a severance package after a certain time period is reached.

But assume in this example that is what happens. What is the taxability of giving the term policy to the employee. I still cannot believe that the employee is taxed upon premiums that were spent for coverage that is no longer applicable.

NQDC with CV is a different story. Then CV is used to determine taxable income for the employee.

This is the first and only thing that makes sense to me. If the employee leaves the company, and they are given a permanent policy, it seems to me that it is the Cash Surrender Value of the policy that would be the taxable benefit. Why would it be more?

 

[scagnt83]

That is my understanding of key man insurance. The company is putting insurance on a key person because if that person dies, the company will encounter financial loss until they can replace and TRAIN the new employee to do what the previous employee did.

You guys were talking about transferring policies to employees. That is common with NQDC but not much with KeyMan policies. And comments DHK made seemed to indicate he was confusing the two in his original explanation. (which he said in his last post) So it seemed the whole convo was a bit off base. Wasnt bashing or anything like that.

If a severance is amicable, and the policy has value (ie. last 20 years of a 30 year term plan) then the employee might like to have it and the employer will have no need for it and won't be continuing with it anyway.

That is true. When a key-employee retires, it is not completely uncommon for the employer to at least offer it to them.

But I would say around 90% of key-employees end up leaving service for a different job offer. At least in my experience working the business market. Employees like that are usually highly sought after and get job offers all the time.

Most just are not set up like that from the start. It is usually more of an "optional" thing employers sometimes decide to do.

Why would anyone set up a key man policy to pay benefits outside the company? Assume the answer is NEVER.

It happens. Its offered as a supplemental employee benefit to key-employees. THAT is why some do it.

Usually the employer gives an end of year bonus to make the taxes a wash for the key employee.

And some employees do not like the idea of an employer receiving benefits if they die while their family gets nothing from that policy. So it can help employees be more comfortable and accepting of the idea (especially if they have never heard of the concept before, which is often true of young employees)

I understand they are on the hook for paying the rest of the premiums to continue the policy, but why should the employee be taxed for premiums for insurance coverage that is in the rear view mirror. I can't even begin to fathom why that would be the case. Had the employee died in those previous years, the company would have gotten the death benefit and there would have been no financial benefit to the employee.

Ask the IRS. I dont make the rules. If I did, there would be a lot less of them! lol

Rational explanation is this; had those Premiums not been paid in the past, the Policy would not be in effect now or in the future.

The cost of a 30 year term is not $2000 per year. The cost is $60,000. And the cost at year 15 is $30,000.

If the employee receives the policy half way through, they are receiving $30,000 in financial benefit from the employer.

And IF the employee had died, yes, they would have received no financial benefit... which is why they would be in a position of never paying taxes on it since it was not their benefit. Once it becomes their benefit, the Premiums paid are considered part of the benefit that employee receives... and are considered income per IRS guidelines. Again, not my rules.

But assume in this example that is what happens. What is the taxability of giving the term policy to the employee. I still cannot believe that the employee is taxed upon premiums that were spent for coverage that is no longer applicable.

Refer to above post. IRS. Total cost of policy. Not my rules.

This is the first and only thing that makes sense to me. If the employee leaves the company, and they are given a permanent policy, it seems to me that it is the Cash Surrender Value of the policy that would be the taxable benefit. Why would it be more?

That is correct. The CSV is used to calculate taxes. IF for some reason premiums are more than the CSV, I THINK Premiums are used instead of CSV. (if I remember correctly, I dont work that market as much as I used to)

But think about it from this angle Bob... why would the entire CSV be taxable on a WL but not the Premiums for the Term? Past premiums are the only reason the CSV is what it is. The employer owned that money/benefit prior to transferring to employee. How are the two different? They are both financial benefits and both required past premiums to get to that benefit level at that point in time.

 

[pfg1]

I use term for key man, not designed to give to the employee....only to protect the company. As mentioned, perm is used in NQDC, exec bonus, etc.