Page 293 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 6. Employee Benefits and Perquisites 279

Analysis of group life insurance imputed income, for John Jones
federal income tax purposes, for
Age as of December 31 of taxable year 42

Employee contribution for group life insurance for $610
taxable year
Gross amount of group life insurance $500,000

Annual exemption from gross coverage $50,000

Net taxable coverage $450,000
Uniform premium rate, selected from the IRS table $540
for employee’s age ($1.20), times net taxable
coverage (450) equals value of company contribution
per IRS table (see Table 6-13)

Minus employee annual contribution $610
Equals imputed income subject to tax 0

Table 6-12. Imputed income worksheet

Table 6-13 reproduces the table issued in 2001 for one-year $1,000 term insurance
premiums covered by Section 79 of the IRC.

Universal Life Insurance. This is similar to ordinary life insurance with greater flexibility
on how often premiums must be paid. With guaranteed death benefits, it has sometimes been
called permanent term insurance but with higher premiums.
A variation is group universal life program (GULP), which is a term policy with a cash fund
that can be used to produce ordinary life insurance and/or accumulate interest tax free. It can
be paid as a death benefit or used to borrow against. The employee’s payroll deduction must
be adequate to cover the term insurance portion. Anything in excess of that amount goes into
the cash fund, where interest payments accumulate tax free.

Variable Life Insurance. With variable life insurance, the death benefit is increased or
decreased based on the value of the underlying bond or stock investments. The time to buy
such policies is during a “down” market for the underlying investments, not when they are at
all-time highs.

Endowment. An endowment policy is similar to term insurance in one respect: the period
during which payment for death of the insured is limited. However, if death does not occur
during that period, then the face value is paid to the insured, either in a lump sum or an
annual annuity. Since the face value of the policy has to be paid not later than the end
of the endowment period (e.g., 20 years), the premiums are higher than whole life. An
endowment policy could be financed by a rollover in whole or part of a retirement plan
distribution. The annuity could either be fixed or variable (fluctuating based on investment
performance).