Executive Benefits
Executive benefits are a key component of many businesses' compensation and retention strategies, particularly for high-level employees or business owners. An executive benefit plan is a contract commitment made by an employer to an employee or a select group of employees to provide supplemental retirement benefits at a future date. This allows the employer to provide rewards and incentives based on an employee-by-employee approach, offering maximum design flexibility.
Types of Executive Benefits
Keyman Insurance
What it is:
Keyman Insurance helps protect your business against the financial impact of losing a key employee, such as a founder, CEO, or key executive. The company purchases a life insurance policy on the employee's life, which can help cover business expenses, lost revenue, or the costs of hiring and training a replacement.
Key Benefits:
- Financial Protection: Covers the business if a key employee passes away, preventing financial loss.
- Stability: Offers the stability needed to find a replacement and maintain operations.
- Loan Collateral: Can be used as collateral for business loans.
- Peace of Mind: Helps ensure continuity in leadership and operations.
Buy-Sell Agreements
A buy-sell agreement is an essential tool for business owners, ensuring that if something unexpected happens to a partner or co-owner, the business can continue smoothly. The agreement establishes who can buy the shares of the departing owner and at what price, ensuring the business stays in capable hands.
Types of Buy-Sell Agreements:
- Cross-Purchase Agreement: Individual owners purchase the interest of a departing owner.
- Entity-Purchase Agreement: The business entity itself buys back the interest.
- Hybrid Agreement: A combination of the two approaches, where the business and owners share the responsibility.
How Buy-Sell Agreements Work:
- Triggering Events: What events initiate the buyout (death, disability, retirement, etc.)
- Valuation Methods: How the value of the business or shares is determined.
- Funding the Buyout: Discuss funding mechanisms like life insurance (which is often used to fund the buyout).
Why It’s Important for Business Continuity: A well-structured buy-sell agreement ensures that ownership transitions smoothly without straining the business. It’s an essential tool for family-owned businesses, partnerships, and small enterprises.
Split Dollar Life Insurance
What it is:
Split dollar life insurance is a collaborative strategy between an employer and an employee to share the costs of a life insurance policy. It’s often used as an executive benefit to provide key employees with valuable life insurance coverage while helping the company manage costs and protect its interests.
How Split Dollar Works
- Premium Sharing: The employer and employee (or business owner) share the cost of the premiums. The employer might pay the full premium or a portion, and the employee receives the insurance benefits.
- Ownership Structure: Explain the different ownership structures, such as the endorsement method (where the employer owns the policy but the employee is the beneficiary) or the collateral assignment method (where the employee owns the policy, but the employer has rights to the death benefit to recover its premiums).
Key Benefits of Split Dollar Life Insurance:
- Attractive Benefit: It provides key executives with life insurance coverage, often at lower personal cost.
- Cost-Effective: It allows the company to provide a valuable benefit without shouldering the full cost.
- Retention Tool: A great way to retain and incentivize top talent, especially when offering a customized benefit package.
- Corporate Control: The employer can structure the agreement to protect its interests, particularly in the event the employee leaves the company.
Tax Considerations:
In a properly structured split dollar arrangement, the premiums may be deductible to the employer, and the employee may not need to pay tax on the policy’s value until the benefits are paid out.
Why It’s Beneficial for Executives:
Split dollar life insurance allows you to give your top executives a meaningful benefit that supports both their financial security and the company’s goals.
