Employee Benefit Plan

February 21, 2021
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Greg Felton, CLU, ChFC, Sales Director
gfelton@nsslife.org

Many members of NSS own a business or are a key employee of a business. Using that as a backdrop what would happen to the business if something happened to this key person/owner? Obviously, the business would suffer. Sales may be lost. Key relationships may no longer be there. Creditors may not feel the same about the business worthiness. What would a prudent person do to minimize this risk?

Here is one idea. Use permanent life insurance to protect the business and perhaps reward the key employee down the road. An example of how this might work follows. A business owner decides that his key employee is a 45-year-old V.P. The owner buys a $500,000 life insurance plan on this person with their permission. Payments would be $1,000 per month. In ten years, the loan value would be $80,000 and in twenty years it would be $220,000. The nuts and bolts of this plan are simple.

  1. If the key employee were to die the business would suffer. The $500,000 death benefit would go a long way towards helping the business overcome this loss or helping the business to find a suitable replacement that could fill the job.
  2. Using the policy’s cash values the owner could make an arrangement with the employee to keep him with the firm, so he doesn’t get lured away by competitors. The owner could promise to pay a $50,000 bonus if he stays with the company for 10 years. A sweeter deal would be the promise of a $200,000 payoff if he stays to retirement age (65). Where do the funds come from? The cash or loan values of the policy.
  3. When the bonuses are paid, the employer would get a tax deduction since this would be a form of compensation to the employee.
  4. The premiums of $1,000 per month are not deductible. They are however assets of the firm so they could always be accessed if needed. In a sense the $1,000 per month payment becomes a forced savings program for the business.
  5. An arrangement could also be made to give the employee the policy at retirement so that he would have life insurance protection for his family.

This is a simple idea with so many positive attributes. This idea works especially well for small businesses but also family corporations and other firms. Think about the possibilities. For more information call your local NSS representative or Joe Elliott in the Home Office.