Our previous post looked at taking a unique approach to executive benefits and compensation. To reprise, the areas which must be taken into account include for many senior executives:
- the higher incomes of this segment which render standard retirement plans inadequate,
- the need to reward executives in a tax efficient manner,
- the loss of revenue or the increase in expense that results from the unexpected departure of a key person.
The previous post focused on the first two points, and demonstrated how Supplemental Executive Retirement Plans (SERP), Deferred Share Units (DSU) or Performance Appreciation Rights (PAR) could all be valuable tools. Looking beyond traditional compensation arrangements is important for those businesses with a focus on the long term. While annual bonuses are beneficial, the type of programs mentioned above are intended to provide a golden handcuff to help retain and reward senior members of the team.
Now let’s address the third point – the loss of revenue or the increase in expense that results from the unexpected departure of a key person.
The need for additional insurance coverage for the executive group has been addressed in this discussion. Depending on the demographics of this group – for example, let’s assume a large number of married employees with young children – the need for additional personal insurance can be solved through the use of optional term life or critical illness coverage.
However, does a company have a need to protect itself in the event that one of the executive team dies or becomes critically ill? When there is a possibility that a company would suffer a loss in revenue or an increase in expenses due to the unexpected absence of a key person, insurance can provide funds to mitigate the loss.
The purchase of insurance coverage on the life of key executives can help cover off any potential shortfalls and provide additional long term incentives to employees. Contracts of this nature are often structured with the employer paying the premiums for life or critical illness coverage which is owned by the employee. However, the company itself is named as the irrevocable beneficiary of the policy. This ensures the company maintains control of the contract, but at a future point can transfer that contract to the employee without a taxable disposition. In order for any future benefits to be received tax free, the annual premium payments are a taxable benefit to the employee. An exception to this structure would be made for shareholder-employees. For any executive in this group, the insurance would be owned by the company in order to take advantage of any potential credit to the Capital Dividend Account.
To further enhance this type of benefit, the life insurance contract can be permanent in nature. Permanent contracts come in a variety of options but usually have cash values that grow on a tax deferred basis and transfer tax-free to the employee at some future date. Generally, the amount contributed to the policy is net of the taxable benefit amount payable by the employee.