Using Life Insurance to Finance a Death Benefit Only Plan

Most DBO plans promise to make payments over a number of years (e.g., $100,000 per year for ten years, if death occurs prior to age sixty-five). Assume a plan promised a $10,000 annual death benefit for ten years to the surviving spouse of a key executive, otherwise to the executive’s children. Assume the employer corporation is expected to be in a 28 percent combined state and federal income tax bracket at the time payments are made. After its $2,800 deduction for each payment, the net cost would be only $7,200 per payment. So it could purchase a $72,000 policy on the employee’s life, and even if it earned no interest on the unpaid balance, it would have sufficient funds to make the promised annual payments. Actually, when interest earnings are factored in, the policy death benefit could even be less than $72,000. The corporation would own and be the beneficiary of the policy and pay all premiums. Note that the $72,000 of life insurance would be received by the employer-corporation income tax free.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

Leave a Comment