Page 300 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)
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286               The Complete Guide to Executive Compensation


            while retired may not be free of income tax consequences and the cost may not be deductible
            to the company until the benefits are paid.
               Due to the complexities of insurance plan variations, the executive must examine the
            available alternatives very carefully. Due to individual needs and circumstances, one form will
            be more appropriate than another. Thus, the assistance of an attorney and accountant along
            with an insurance and tax expert in designing the optimal plan is critical.

            Which Type Does One Choose?
            Term insurance may be the only true form of life insurance. Other forms, including whole
            life, have some form of investment consideration in addition to insuring risk. Rather than
            viewing term and whole life as competing forms of insurance, they should be viewed as
            complementary—each with different characteristics that must be evaluated in terms of indi-
            vidual requirements. Some advise purchase of term insurance for the amount of protection
            needed and investment of the difference in cost versus a whole life policy. However, when
            considering investing the difference between term and whole life or some other form of
            insurance with cash value buildups, there are a number of considerations. Is the individual
            willing to have no insurance beyond the period in which term insurance will expire? What is
            the rate of return on the alternative investment(s)? How secure is the investment? What is
            the risk on the rate of return? On the invested principle? Will the individual stay with the
            investment plan? Is the estate an issue? Does the master contract permit the employee to
            assign all rights of ownership to another party, thereby removing the proceeds from one’s
            estate? The value of assignments must be examined in terms of the particulars on estate tax-
            ation. The overall importance of these various forms is probably moderate but will range
            from low to high given individual circumstances.
               It is rather common to give each employee an insurance amount equal to two times pay.
            Alternatively, the contract could provide a specified amount of coverage for everyone (e.g.,
            $50,000); however, this might mean overinsurance at the low-earnings level and significant
            underinsurance at the executive level. Company coverage is most probably one-year renew-
            able term insurance purchased from a life insurance company. Being term, it has no cash
            surrender value and is in effect on a year-to-year contract basis with the insurance company.
            Other Insurance Benefits

            Survivor Benefit. A number of companies provide a survivor benefit in addition to—or in
            lieu of—the basic life insurance program. This benefit typically provides a stated percentage
            of the employee’s earnings at the time of death (e.g., 25 percent) to the spouse (possibly
            higher benefits if dependent children are also involved) either for life or a stated number of
            years (e.g., until the deceased’s 65th birthday). The amount could be constant (e.g., $10,000
            a month) or adjusted based on certain milestones (e.g., $15,000 a month until children are no
            longer dependents, then $10,000 a month). Or it could be adjusted based on age (e.g.,
            $12,000 a month until age 65, then $6,000 a month). Such a program might be tied to
            certain assumptions about social security benefits.
               Sometimes such programs give executives a false sense of security, as they fail to assess
            the possible impact of inflation upon a constant payment. For example, inflation of 7 per-
            cent would halve the purchasing power of the payments in approximately 10 years. Thus,
            while such a program is very helpful, it may need to be supplemented, especially for the
            executive with a young spouse. It is also important to determine whether such plans permit
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