Corporate owned life insurance is used in for various ways, including the funding of deferred compensation plans. The use of life insurance to fund these plans is common because life insurance as a financial instrument has unique attributes that especially apply to funding corporate plans for executives:
- The equity growth on life insurance is tax deferred for the corporation and for the employee.
- Withdrawals can be set up to be taken on a tax favored basis.
- There are corporate tax advantages.
- The life insurance benefit in the case of an executive death will come back to the corporation which can enhance the benefit or reduce costs for the corporation.
Another interesting use of corporate owned life insurance would be in the use of life insurance to fund buy-sell agreements using the deferred compensation plan. Suppose you have a group of ten executives, three of whom were also stockholders. The three stockholders are interested in adding a deferred compensation plan to reward and motivate the company’s executives.
After study and recommendations from a consultant associated with LifeInsure.com, they decide to use life insurance to fund the plan but instead of ten policies on the ten executives, they purchase three larger corporate owned life insurance policies covering only the three stockholders.
The cash values on the three policies are increased enough to fund the deferred compensation plans of all ten executives. Thus, the stockholders can use corporate dollars to fund the buy sell program. At the same time, the company motivates the management team to attain corporate goals because the design of the deferred comp plan is set up to reward executives for corporate performance.
These are very specialized and sophisticated plans. If you’re a stockholder at a successful corporation, our compensation specialists can show you how to design these programs. You should call LlifeInsure.com at 866-691-0100 and ask for a corporate compensation specialist or email us and enter deferred comp or COLI in the subject line.