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Termination Death Benefit for Large Corporations

/// Posted by Bill Sapers

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Termination Death Benefit for Large Corporations: How Not to Lose Benefits to Taxes, While Insuring Recovery of Accrued Liabilities

It is a hard, somewhat morbid, topic to face, but the death of business executives at large companies is a financially fraught time for both the company and family of the executive alike. The financial payout of termination benefits  at the death of an executive is taxed heavily, usually leaving between 30-35% of benefits after estate and income taxes to their heirs.

Having spent a lifetime analyzing such situations and dealing with them first hand, I can definitively say that I’ve found a better way for all parties to plan for such difficult moments. To first test my theory, I spent a number of months searching through the proxy statements of large corporations who have had executives die while employed. I calculated how much the company paid out in “death benefits” (salary, incentive bonuses, stock options, etc.) that were promised to the employee and now passed on to their estate. In most every case, the company paid large amounts, which were then taxed through the roof leaving only a small portion of what was promised. 

An insurance methodology we’ve developed has been shown to mitigate, even erase, the financial losses on both sides. By taking out a life insurance policy on executives, a company can ensure that executive beneficiaries receive 100% of the benefits promised in the executive contract with little or no taxes. Furthermore, the employer recaptures the accrued expense of the promised benefit and receives a full refund of all premiums paid at death. If the executive employee leaves or retires before death, the company can cash in the insurance policy and still receive an amount equal to the premiums paid. For a large cash rich company able to pay out premiums, there is no downside.

For Example:

Assumptions:

  • Executive Age 60
  • Retirement age 70
  • Needs $10,000,000 termination benefit at death
  • Premium $767,070/year
  • Assume market return of 3.95%
  • Executive in 30% tax bracket
  1. If death occurs 1st year, Corporation gets $767,070 death benefit – equal to premium. Executive, if set up properly, leaves heirs $10,000,000 – no income taxes and no estate taxes.
  2. If death occurs 10 years after plan is adopted, corporate outlay would have been $5,369,491 and the corporation would receive a death benefit of $5,369,491. In addition, the corporation would recover all of its accrued liability. Meanwhile, the Executive’s beneficiaries, instead of receiving $3,000,000 net after estate and income taxes, would get $10,000,000.
  3. If at age 70, the Executive were to retire, the Corporation would cash in the policy receiving a projected sum of $5,641,213 ($265,000 more than its $5,369,491 premium outlay), the Executive would receive their promised termination benefits.

Contact Bill Sapers for more information around insuring against Termination Death Benefit losses. Reach out to Bill to discuss options, plans, and particulars.

Call on 617.225.2600 x0121  or email wsapers@sapers-wallack.com