11 Reasons to use a Death Benefit Only Plan

This article provides a behind-the-scenes look at 11 reasons why you should think about using a death benefit only plan instead of a traditional insurance policy. Understanding the various circumstances will help you make a more educated financial decision.

  1. When the employer client seeks an employee benefit to recruit, retain, reward, and counterbalance the limitations upon key employees found in qualified retirement plans.
  2. When the employer client wants an employee benefit that is simple, cost-effective, and free from administrative burdens. Cost-effective, in this sense, means the employer pays nothing if the plan does not achieve its goals and pays a minimal amount if the plan is successful. No payments are required under a DBO program if the employee leaves the employer, for any reason, before his death–all benefits are forfeited. This is a strong incentive for an employee to remain with the employer. The employee also becomes aware of the fact that the after-tax personal cost of a death benefit (such as $100,000 per year for ten years) is significant, even if term insurance is used. This enhances the employee’s appreciation of the employer, increases employee loyalty and makes it less likely that an employee will leave the employer. Additionally, should an employee leave, the employer may still maintain the life insurance on the employee’s life and retain 100 percent of the proceeds (net of premium costs), since there would be no obligation to make payments to the employee’s survivor. The net (after any AMT) proceeds would be a direct positive addition to corporate surplus.
  3. When the employer wants to pick and choose who will be covered, under what terms and conditions, and at what amounts.
  4. When the employer wants a supplement to a qualified retirement plan.
  5. When a shareholder-employee wishes to utilize his corporation to provide personal financial security.
  6. When a means is sought to supplement payments under a buy-sell agreement. Instead of increasing the valuation of stock to the highest level reasonable minds might agree to, this difference could be made up outside the buy-sell through the DBO plan. This technique might be particularly useful in a large professional corporation.
  7. When an employer would like to provide liquidity and income security for a younger employee’s surviving family if the employee were to die while employed, and then, if the employee should survive until retirement, convert the DBO plan to a nonqualified deferred compensation plan in order to provide retirement security. If the employee dies while working, but before retirement, payments will be made from the DBO plan. After the employee reaches age sixty-five (or whatever retirement age is selected), payments can be made from a deferred compensation plan established voluntarily by the employer shortly before the employee’s retirement and financed fully or partially with assets (typically policy cash values) that otherwise would have been used in the DBO Plan.
  8. When a client is over age fifty, is currently providing protection for his family under a split dollar arrangement, and would like to avoid rapidly rising costs of the taxable insurance protection element. Conversion of the split dollar arrangement to a DBO plan provides a way to continue the security without the income tax (but changes tax-free income to taxable income at death).
  9. When a client has a large estate subject to federal estate tax, is in a high-income tax bracket, has no need for additional retirement income, but wants to provide additional income or estate liquidity for survivors.
  10. Where the group term life insurance plan is adequate for rank-and-file employees but is not sufficient (or is becoming overly expensive in large amounts) for top executives or other key individuals. It is often possible to provide DBO coverage of equivalent value at comparable cost to the employer and reduced cost to the executive.
  11. Where an employer is truly and deeply concerned with the well-being of the families of company employees but does not want death benefits diverted to someone other than a survivor of a deceased employee. Especially, because widows between the ages of fifty and sixty-five have a particularly difficult time finding employment and are less likely to remarry, and because many executives have children in college, graduate, or professional school about that same time, covering key employees in this same age range can be particularly important.
Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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