While group term life insurance is a valuable “employee benefit,” many employers do not realize that these plans:

• Are subject to strict discrimination rules which limit an employer’s ability to   provide additional coverage to their key employees;
• Do not provide the amount and type of life insurance benefits that many key   employees want and need;
• Provide limited or expensive coverage options to a retiring key employee;
• Require the use of very expensive IRS term rates for employee reportable    income purposes;
• Are not a cost-effective way to provide large amounts of coverage.

Offer your key employees a group carve-out plan. Under a group carve-out plan, your business can:

• Supplement or reduce the group term life insurance benefits offered to your    key employees with individual term or permanent life insurance coverage;
• Choose the key employees that you wish to cover and the type and level of    their benefits;
• Design plans which meet the benefit needs of your business and its key    employees.

There are two design options that your business can use to fund your group carve-out plan, a bonus plan or split-dollar plan.

Under a bonus plan, your business pays all or part of the premium due on a term or permanent life insurance policy owned by your key employee. The benefit of a bonus plan to an employer is that your premium outlay is tax deductible. In addition, a bonus plan is simple and easy to administer.

Alternatively, the business can fund a permanent insurance policy using a split-dollar plan. Split-dollar is a unique fringe benefit plan which “splits” the premium, cash value, and death benefit of a permanent insurance policy between a key employee and the business. Ordinarily, the business will pay the majority of the annual premium and will “recover” its outlay from the policy’s cash value and death benefit.

Although premium outlays made by the employer are non-deductible under a split-dollar plan, the employer cost recover option is an important benefit to consider. From the key employee’s perspective, a split-dollar plan provides insurance protection at rates which are far lower than the rates which are required to be used under group term plans.

Choice – Your business has the ability to choose the key employees that you wish to cover under your group carve-out plan.

Improved Benefits – A group carve-out plan offers your business an opportunity to improve the life insurance benefits for your key employees free from the discrimination concerns which apply to group term life insurance plans.

Cost-Effective – Individual life insurance coverage, which requires medical underwriting, is usually less expensive than group insurance coverage.

Improved Coverage – Group carve-out plans usually improve life insurance benefits.

Wealth Accumulation – Group carve-out plans often utilize permanent insurance. Depending upon your plan design, key employees can develop cash values to supplement retirement income needs.

A group carve-out review is a valuable way to determine how your life insurance program can be improved for your key employees.

This is intended to provide you with a general overview of some of the advantages of using life insurance as a vehicle to fund nonqualified benefit programs. Always consult with your professional team of advisors for guidance pertaining to your particular situation.