For many firms, group term life insurance is a popular employee benefit because it is relatively inexpensive. This is especially the case when a practice has younger, lower-paid employees. In addition to low cost, the premiums for $50,000 of group term life insurance coverage are fully deductible to the firm. In many circumstances, this can certainly be a win-win situation for both employer and employee.
However, what happens when older, more highly paid employees or partners are thrown into the mix? In such cases, costs can rise dramatically because term insurance premiums are higher for older individuals. Also, if a group life insurance benefit is based on multiples of income, this can further increase the employer’s cost, as well as create a potentially substantial tax liability for the employee because the cost for coverage over $50,000 is included in taxable income.
Today, rising group insurance costs may place the smaller practice in a precarious situation. If a company elects to forgo group term coverage altogether, it risks losing key employees to competitors. At the same time, a firm may be unable to justify the increasing expenses. Fortunately, there is an attractive option for today’s competitive, cost-conscious firm.
The Best of Both Worlds
Executive group carve-out is a cutting edge benefit strategy that allows employers to control the costs of a group term life insurance plan, receive full deductibility for expenses, and maintain their firm’s competitive and recruiting edge. Here’s how it works.
Group term insurance coverage for older, highly paid employees that exceeds $50,000 is essentially “carved out” of the existing plan. In return for the “carved out” portion of term insurance coverage, these employees are given a permanent, cash value life insurance policy. The employee owns the new cash value life insurance policy. The employer provides the employee with a bonus, which is used to pay policy premiums.
There are several key advantages that executive group carve-out provides for both the employer and the employees:
- The bonus to the employee is fully deductible to the employer as a bona fide business expense.
- In most cases, the premiums on the cash value policy will generally remain level. Thus, the only cost increases for the employer are those from the $50,000 term insurance portion of the group coverage.
- Because the employee owns the cash value life insurance, its benefits will not cease at retirement. In this respect, as long as premium payments are made as stated in the policy, the policy can provide lifelong death benefit protection and cash values that can be used by the employee to supplement a variety of financial goals and objectives.
- Employee/owners can also reap the benefits of executive group carve-out.
Review Your Situation
In today’s highly competitive marketplace, it is important for firms to be creative, yet cost-effective, with the benefits they offer. If your firm currently offers group term insurance coverage, it may be worthwhile to explore how an executive group carve- out plan may benefit you and your employees.