Page 308 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

294 The Complete Guide to Executive Compensation

Compensation Year 1 Year 2 Year 3

Salary $200,000 $210,000 $220,000
Bonus 50,000 150,000 40,000

Total 250,000 360,000 260,000
Company A

1 times salary bonus $250,000 $360,000 $260,000
2 times salary bonus 500,000 720,000 520,000

3 times salary bonus 750,000 1,080,000 780,000
Company B

1 times salary $200,000 $210,000 $220,000
2 times salary 400,000 420,000 440,000

3 times salary 600,000 630,000 660,000
4 times salary 800,000 840,000 880,000

Table 6-18. Insurance for salary only vs. salary and bonus

instead in determining the imputed income tax. However, the IRS may view this from the
economic benefit perspective, rather than in terms of actual cost. This waiver feature may be
of moderate interest to executives.
Conversion. Important to executives leaving the company who are not in the best of health is
the conversion privilege that within a specified period of time, such as 30 days, allows the insured
to convert the group term protection to an individual policy of permanent protection without
having to pass a medical examination. Typically, companies are assessed a charge per $100 of
converted coverage, in large part to offset the higher risk the carrier is assuming without receiv-
ing a higher premium. In many instances, the premium paid by the executive is higher than
that charged for low-risk protection for insured persons who are in excellent health. Of low
interest to executives until it happens, this option then becomes of high interest.
Assignment. Life insurance proceeds are not subject to income tax, but they are considered
part of the deceased’s estate and, therefore, subject to estate taxes. An exception to this is
when the employee has irrevocably assigned the policy to either a trust or the individual
intended to be the beneficiary. The assignee is now the owner of the policy and the benefi-
ciary, and is responsible for paying any premiums due. Assuming such assignment meets the
legal test (some argue that group term insurance can never be irrevocably assigned since it is
essentially one-year term insurance) and is made at least three years prior to the executive’s
death, the proceeds probably will not be considered part of the estate. However, the imput-
ed value of the insurance will be considered a gift, and while no tax payment is required at
the time, it will be charged against the allowable lifetime exclusion (Revenue Ruling 79-47).