corporations and whole life insurance this is a popular topic and it's one of my favorites
just to kind of explain how the model works it's interesting to see how companies utilize
cash value life insurance with their executives so let's get into it when
we take the corporation and implement a whole life insurance strategy with their executives
you often see it on the executives however it's not exclusive to executives it's often referred
to as a non-qualified deferred compensation plan non-qualified meaning the company's not deducting
the payments or a SERP can be a combination of both surface stains for supplemental the
executive retirement plan so how it works is what we have a company that typically will take
out life insurance policies high cash value life insurance policies you'll see why they're high
cash value from day one day one but they're often they are on these policies a number of executives
here we're just going to focus on executive number one so how it works when we've had a
policy company is the owner payer and beneficiary so the company owns the life insurance policy they
make the contribution they fund the policy and they're often the beneficiary now sometimes they
will allow for the executive to be a partial beneficiary but because they are funding the
policy they're making sure that they have a cost recovery at the end of the day the company again
makes the contribution now for the executive because you're going to see when a company
opens a policy right if I own a business and I say to you Mr. or Mrs. executive we're gonna put
this life-insurance policy on you I the company I'm going to pay the premium I the company I'm
going to grow cash value it's going to be an asset on me the company my balance sheet I the
company will collect when you die okay what's the benefit for you as the executive all often
what will happen is if you the executive meet my investing period which is one hundred percent
of determined by the company could be ten years twenty years it could be a certain age maybe it's
performance based all companies have different ways of doing things but if you meet that vesting
period those vesting requirements I'm going to pay you mister miss an executive a retirement
benefit almost like a pension now you do need to meet that vesting period in order to receive that
retirement benefits from me the company if you don't if you decide to leave the company maybe
you try and start your own business whatever it might be going to work for the competition but you
don't meet that vesting period you don't get that retirement benefit this makes it very difficult
for companies key employees their top talent to leave companies you'll hear the same golden
handcuffs handcuffs it's a nice way to retain top talent and then reward them on the back end
so how it works is let's say company company ABC is paying in could be any amount on this
executive let's say it's fifty thousand per year that's the payment that is going to do what build
cash value on the corporation's balance sheet so this is an asset on their balance sheet if
it's rich in cash value in equity day one that's accessible to them they can use that whether they
assign it as collateral for a line of credit whether they whether they borrow from it let
it sit and grow as the safe asset doesn't matter they have access to that cash value assuming this
is a non qualified traditional life insurance policy this will also build a substantial death
benefit now again the company is the owner of the life insurance policy because they are the owner
they have control of everything payments accessing cash adjusting beneficiaries some companies will
make an employee's family member or their estate or trust a partial beneficiary depends on the
company you do have that option which is nice but as the owner they execute full control of
everything so I'm the company I'm funding 50,000 per year whatever amount building cash value in
the balance sheet which I can access also have a substantial death benefit so if the executive if
you the executive stay with me the company let's say until age 65 you hit your vesting period you
say okay I'm retired I've got my other savings asset for assets personal policies 401 k's real
estate all that good stuff but now Steve it's time to collect all it is you met your vesting period
what'll happen is let's say that that retirement benefit is a hundred thousand dollars per year
and again this is determined by the company typically upfront perhaps this is age 65 85
or 90 whatever it might be but you had to be domestic period together so that hundred thousand
so this is a executive that's retired they're no longer producing revenue for the company how'd
this hundred thousand or whatever the retirement benefit is paid out is from the cash value build
up over time what's happening is the company is going to use that cash value to pay the benefit
out so this way it does not impact their revenue or their cash flow which can be good especially if
things slow down on any given year so where this helps the company is they're going to pull from
the cash value to pay that retirement benefit each year to the retired executive now what
happens here is they pull it from the cash value whether it's your withdraw or a loan to make sure
there's no taxation on the distribution that's not going to be taxed when the company pays the
executive the hundred thousand they pulled it from the cash value did not impact revenue that's what
as they paid it that was a compensation expense that means on the back end when they actually
pay that retirement benefit it has deductable to the company as a compensation expense and it is
taxable the executive as income is their receiving income now I forgot to mention an important point
that questions come up is if it's a non-qualified deferred comp plan non-qualified a qualified would
be a 401k and IRA because it's not qualified it is not deductible so companies fund large dollar
amounts in that they can't deduct the advantages to back-end they can't deduct their retirement
benefit and also remember that cash value is very liquid so they can use that if needed as as
they desire so back to the retirement that 100k is taxable to the executive but it is deductible as a
compensation expense to the company now eventually what's going to happen to mr. executive gonna kick
the bucket when he kicks the bucket when he's he or she dies these plans are always set up so that
there is a sizable death benefit we want to make sure a full cost recovery is in place to recover
the contributions made to the policy so if I paid fifty thousand for ten years in funding
that policy I want to make sure I get the five hundred K back and I want to account for inflation
we do try and build that into the equation into the scenario as well this way a corporation gets
their money and everything back in they've also rewarded the executive on the back end strategies
can work very nicely they do and have been used for a long time it's interesting how so so many
people are not aware of it we've had conversations with CFO's that you start to explain the strategy
they kind of have a hump yeah I knew like other companies use cash value life insurance but I
didn't know that it worked like that all right I'm interested so hopefully you found this a video
informative educational and such if you'd like more information or like to see any custom sample
its feel free to reach out anytime we want to love to work with you and that's all I got hope this
helps hey guys Steve Parisi here if you enjoyed the content you just saw please subscribe like
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