Executive Benefit Case Study
Helping a producer write $35 million in new life insurance policies by designing a compelling EXECUTIVE BENEFIT plan.
Facts of Case:
This case involved an S corporation with three highly compensated, key employees. One of these key employees was a minority owner in the business and owned 10% of the company. The other two employees were not owners, but each was important to running a critical part of the business.
The business profile included the following:
- S Corporation
- 5 stockholders with only one of them active in the business
- 250 employees
- The corporation had an annual revenue of more than $60 million
- About $100,000 of cash flow was available for a retention plan for the 3 key employees.
The business was concerned about several issues, including:
- Retaining the 3 key employees until their respective retirement dates.
- Protecting the corporation from loss in the event of death, disability, retirement or, leaving to join a competitor.
- Maintaining control of any retention plan values.
- Building value inside the corporation to bolster price in event of a later third-party sale.
Presentation to Client:
- The producer had a face-to-face meeting with the key executives to provide general information about potential solutions and to garner additional facts that would help determine which solution might be most appropriate.
- From the information gathered at the initial meeting, it was determined that the Supplemental Employee Retirement Plan or SERP financed with permanent life insurance on each executive was the preferred option.
- We worked with the producer to determine which product best served the dual needs of SERP funding and key person coverage. We provided illustrations of the SERP concept and walked the producer through the presentation that we created.
- The producer met with the key employees (and we were available through video teleconferencing) to review the SERP concept with specific numbers and to show them the illustrations of the life insurance contracts which served as the informal funding vehicle of the SERP.
- The producer then met with the S Corporation’s CFO and the corporation’s CPA to discuss in detail the proposed SERP plan which had been previously presented to the key employees.
During several case design meetings with the Producer, we discussed the following potential solutions:
- Key Person Insurance coverage to protect the corporation from the death or disability of one of the key employees.
- An Executive Bonus Plan to reward the key employees through contributions to a personally owned permanent life insurance policy.
- Split-Dollar Life Insurance Agreements (both endorsement and collateral assignment) between the Corporation and each key employee.
- Non-Qualified Supplemental Retirement Plans (including the phantom stock plan) financed with a permanent life insurance policy owned by the corporation.
- A combination of two of the above plans.
Post Case Analysis:
- The corporation initially considered other plans but decided on the nonqualified SERP because of their overriding desire to have the company retain control of the life insurance policies. The company was also attracted to the dual purpose of the corporate-owned life insurance: it could not only pay for the SERP benefit at retirement or at an earlier death but could also provide the corporation with key person insurance coverage.
- In this case, a SERP plan was implemented on a key employee who was also an owner. Generally, we do not recommend SERP plans for owners of S corporations but we wanted to treat the three employees similarly. An S corporation is a pass-thru entity for income tax purposes and therefore an owner cannot defer taxation on any income. Ideally, it would be more tax-efficient to have the company use a bonus plan and purchase a personally owned policy for the owner-employee.
- 3 life insurance policy applications were taken with an aggregate face amount of $3.5 million and an aggregate premium of more than $95,000. To meet the separate key person needs, the corporation opted for higher insurance coverage than necessary for SERP funding alone.
- Having assisted in providing for their retirement needs, the producer now plans to meet with the 3 key employees individually to discuss their respective estate plans. The producer plans to discuss further with the 5 business owners their business succession plans.