Ways to Solve the “Reportable Tax Income Cost” Problem with Group Life Insurance for Older Employees

It is true that a very substantial amount of income can be generated by group term life as the employee ages. For ages sixty-five to sixty-nine, the reportable cost per thousand per month is $1.27, while for ages seventy and over, the reportable cost per thousand per month is $2.06.23

One solution is the executive bonus carve-out, a simple arrangement that provides up to $50,000 of coverage for all employees (including retired employees) through the group insurance plan, but carves out selected employees for special treatment.

Specifically, the chosen individuals are provided with amounts of individual term and/or whole life insurance by the employer. Premiums are paid by the employer, but reportable by the employee as income. To make up for the income tax burden, an additional bonus is paid in cash to the employee. This is particularly appealing when the corporation is in a higher bracket than the executive.

Permanent insurance is often preferable in a group carve-out since the goal is to reduce or eliminate the out-of-pocket cost and reportable income of retired executives. This can be accomplished by using a limited-pay policy along with applying dividends to pay premiums so that the policyowner’s out-of-pocket premium payments diminish over time, usually to zero in seven to ten years. Because the shareholder-employees and other key executives generally want substantial and permanent coverage, one solution is the executive bonus carve-out life insurance plan. The characteristics that make this approach appealing include:

  • The plan is simple and easy to present to corporate officers.
  • They can use the corporation as a vehicle to provide individually-owned permanent life insurance for shareholder-employees and key executives.
  • The plan avoids the complex and costly nondiscrimination rules for excess coverage.
  • The plan is flexible and the company can provide additional insurance amounts through Code Section 162 bonus or split-dollar coverage.
  • Leveraging may be possible because the corporate deduction may be greater than the taxable income incurred by the participants in the plan.
Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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