This article provides a behind-the-scenes look at 6 advantages and why you should think about using a death benefit only plan instead of a traditional insurance policy. Understanding the various benefits will help you make a more educated financial decision.
- Under current law, if the covered employee is a shareholder who owns 50 percent or less of the stock of the corporation, payments under the DBO plan will be excludable from the covered employee’s gross estate. This avoidance of federal estate tax is particularly valuable to individuals whose estates, for one reason or another, will not qualify for a marital deduction.
- Large amounts of continuing income can be provided through a business to the beneficiary of a key employee. This significant financial assistance is available to employees without regard to whether they are shareholders.
- During the employee’s lifetime, since the employee has no current right to payments or to the life insurance financing the employer’s obligation under the plan, the employee is not taxable on premium payments. Compare this with the taxable income reportable under large amounts of group term life insurance, split dollar life insurance (cost of the pure death benefit), or life insurance maintained inside a qualified retirement plan (cost of the pure death benefit).
- Employers can pick and choose who will be covered under a DBO plan, the terms of that coverage, and the level of benefit payments to be provided to recipients. There are no government (state or federal) mandated limits. This makes the DBO plan an ideal way to help solve the employer’s problem of attracting, retaining, and rewarding employees, as well as counterbalancing the limitations upon highly compensated employees found in qualified retirement plans, without the costs of extending such benefits to the entire work force.
- When payments are made by the employer, income is taxed at the brackets of the beneficiaries, which are likely to be lower than the covered employee’s tax bracket.
- An employer can leverage payouts with income tax deductions. So if tax rates increase the amount that can be paid out increases. Conversely, if the employer decides to keep payouts level, the corporation will often receive enough, even after all promised payouts are made, to realize not only a return of all outlays, but, in some cases, net a profit that can serve to offset the cost of the use of money expended for premiums.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM