Life insurance in executive benefits

Group term and its ceiling

Employer-provided group term life insurance is the baseline benefit. Under Internal Revenue Code section 79, the cost of coverage up to $50,000 is generally excludable from an employee's income, and the cost of coverage above that limit creates imputed income calculated under IRS tables.

That ceiling is why higher-paid executives often end up with taxable imputed income on generous group coverage, and why carve-out arrangements exist. Confirm current treatment with a tax professional before relying on any of this.

Group term carve-out

Instead of providing large group coverage that generates imputed income, the employer provides coverage up to the excludable limit and funds individually owned coverage for the executive above it.

The executive gains a policy they own and can keep on leaving, rather than coverage that ends with employment. That portability is often the real value to them.

Executive bonus plans

Sometimes called a section 162 bonus arrangement. The employer pays a bonus which the executive uses to fund a personally owned policy. The bonus is generally deductible to the employer as compensation and taxable to the executive.

It's the simplest of these structures: the executive owns the policy outright from the start, with no employer claim on it. Some arrangements add a restriction limiting access to cash value for a period, which is where retention terms get negotiated.

Split dollar

The employer and executive share the costs and benefits of a policy under an agreement. Two general regimes exist — economic benefit and loan arrangements — and the tax treatment differs materially between them.

These are genuinely complex, the regulations are specific, and arrangements entered into casually have caused real problems. Do not implement one without specialist tax counsel.

Corporate-owned life insurance

Companies also own policies on executives to fund deferred compensation obligations, to provide key person protection, or to informally fund a nonqualified plan.

Two compliance points matter here. Notice and consent requirements apply to employer-owned life insurance — get written consent before the policy is issued, not after. And nonqualified deferred compensation arrangements are subject to their own rules, with meaningful penalties for getting the documentation wrong.

Questions to settle before implementing

• Who owns the policy, and who controls the cash value
• Who is the beneficiary, and can that change
• What happens if the executive leaves — does the benefit survive
• What the tax treatment is for both parties, in writing from a tax adviser
• Whether written consent and notice requirements have been satisfied
• How the arrangement is documented, and by whom