In addition to the simplicity, ease of implementation and administration, and plan design and funding flexibility, an executive bonus arrangement can meet an array planning needs if presented properly to the employer and comprehensively to the executive.
The need to protect against death isn’t always one that lasts a lifetime. If coverage is placed in anticipation of future estate tax liability, then the policy better be there until the end – unless an insured wants to bank on the repeal of the inheritance tax during some rare moment of temporary governmental sanity.
On the other hand, if the purpose is merely to replace income lost due to death prior to retirement, then term insurance may be a better and more economical choice. There is no reason a plan cannot fund term insurance.
In an age of restrictions on access to qualified retirement planning opportunities for the highly compensated, more employees are using over-funded permanent policies as a sort of “Super-Roth IRA” to build cash that will be available on a tax-advantaged basis, and to supplement other retirement fund sources in later years.
A plan participant has the freedom to choose whether he or she wants to design their policy under slim or fat funding scenarios, in order to meet their particular needs.
It may better suit multiple needs if the amount of the bonus to an executive is used to purchase multiple policies; e.g. a term policy to protect for income replacement, and a permanent product for lifelong needs. At retirement, the term policy can lapse or can be converted if the need for permanent protection has increased.
A participant should consider the option of adding a rider that will allow early access to benefits should long-term care be needed. Withdrawals for long-term care expenses may frustrate the effectiveness of the policy, if the employee is over-funding the contract for use as a supplemental retirement vehicle.
Again, this problem can be avoided by using a two-policy executive bonus arrangement – one that is over-funded for retirement purposes, and the other with a LTC rider.
The waiver of premium rider has been pushed to the side in most sales presentations today, but its use can assure that policies will be maintained in the event of a disability, and even if employment ends prior to retirement age for that reason.
The executive bonus can be used to fund any vehicle agreed upon by the employer and the employee. If additional life coverage is not needed, then consider funding an annuity or a free-standing long-term care policy. All aspects and advantages of a 162 bonus plan still apply.
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