Typical non qualified plans of life insurance for key employees include:
- permanent life insurance dividends generated by the policy are used to pay the income tax of the key employee that results from the premiums paid by the employer on the permanent insurance policy. For federal tax purposes the employer-paid premiums are taxed as additional earned income for the employee. Under the better permanent policies, after the policy has been in force a few years the dividends should exceed the taxable premium income to the employee. The advantages of permanent insurance to the key employee include life insurance coverage for life, increasing cash values, increasing dividends selection of beneficiary, and ownership of policy.
- TERM LIFE INSURANCE premiums paid by the employer are considered federal taxable income to the employee. Employee selects beneficiary and owns policy. Policy probably will not remain in force after retirement because the premiums continue to increase in cost and become prohibitive.
- SPLIT DOLLAR LIFE INSURANCE permanent life insurance is purchased on the life of the employee. Premium payments are split between the employee and the employer. The employer has an equity interest in the cash value of the policy to the extent of the premium payment he or she has paid in. The employee has an equity interest in the cash value of the policy to the extent that the cash value exceeds the premiums paid in by the employer. Under the better permanent policies, the cash values will accumulate to a substantial sum, whereupon the employer can withdraw from the cash value an amount equal to his or her premium paid in. At this point the split dollar plan is said to terminate, and the employee has sole possession of the policy. The cash values remaining should be sufficient so that no further premium payments are required by the employee to keep the policy in force.
- SALARY CONTINUATION PLAN employer usually purchases permanent life insurance on the life of the employee, is the beneficiary of the policy, and owns the policy. If the employee dies before receiving all promised supplemental pension benefits, the employer will pay the remaining supplemental pension benefits to the beneficiary of the deceased employee. Funds for payments are provided from the life insurance proceeds.
- Death Benefit Only Life Insurance Plan employer usually purchases permanent life insurance on the life of the employee, is the beneficiary of the policy, and owns the policy. Premiums paid by the employer are not considered federal taxable income to the employee. Upon the death of the employee, the employer will use the life insurance proceeds to pay death benefits for several years to the employee's beneficiary. The employer receives the life insurance proceeds tax free; however, the death payments to the employee's beneficiary are federal taxable income to that beneficiary. This plan can also be utilized to supplement the employee's pension plan at retirement.