Using Life Insurance to Retain MVPs An executive bonus plan funded with cash-value life insurance could be used to attract, reward, and retain valuable employees.

Employee turnover is increasing as the economy and job market continue to improve. As a result, 63% of companies now say that employee retention is a top concern, and about half of all employers report a lack of skilled applicants for their open positions.1

Thus, it may be difficult and expensive for businesses to replace experienced employees who decide to leave. It’s estimated that turnover costs are about 21% of an employee’s annual salary, but the cost to replace top performers and fill critical management positions could run even higher.2

An executive bonus plan funded with cash-value life insurance could be a cost-effective way to reward and help retain your most valuable employees.

Motivation to Stay

An executive bonus plan is typically easier to adopt and more flexible than some other types of employee benefits. The business pays the premiums with bonuses that are tax deductible to the employer but taxable to the employees. The company determines the amount of each bonus and when to pay it, so the timing of the expense can be controlled.

A bonus plan may also be designed with certain restrictions and vesting requirements that make the life insurance policy more valuable for an employee who remains with the company.

The employee owns the policy and also bears the responsibility for keeping it in force. He or she can borrow against, and sometimes withdraw from, the cash value if needed for emergencies, to pay college tuition, to help fund retirement, or for any purpose. If the policy is in force at the time of death, the employee’s named beneficiaries will receive the death benefit, minus any outstanding loans, free of income tax.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that the individuals for whom you are purchasing the policies are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.

1) PayScale 2015 Compensation Best Practices Report
2) The Wall Street Journal, March 13, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.