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Employee & Director Life Insurance Plan

A large family-owned mining company was facing some significant liabilities as it related to various benefits and long-term incentive plans that would be triggered at death and retirement. This exposure existing across fifty key executives, senior managers, and board members.

Challenge

The family had a desire and market need to provide additional benefits to its key employees and board as 100% of the ownership remained within the family. The need for additional incentive  benefits drove a liability that was growing and created a need for life insurance benefits to the participating employees and directors. Based on cost-recovery targets and a need for a life insurance plan for key employees and directors, the company determined it needed coverage of a $1,000,000 on each participant.

Solution

After evaluating several options, the company decided to implement a Corporate Owned Life Insurance (COLI) plan with an endorsement Split-Dollar arrangement to provide some life insurance benefit to each employee and director. The life insurance carrier issued $1,000,000 of death benefit on each participant. Upon death, $500,000 will be paid to the corporation and $500,000 to the executive’s beneficiary.

  • The structure allowed the family to maintain ownership while providing competitive long-term incentive benefits and life insurance to its key employees and directors
     

  • The death benefits provide long-term cost recovery to help the family recoup some of its cash flow to provide long-term incentive benefits
     

  • Life insurance provides the family with current high cash surrender values generating a positive cash on cash return and liquidity on the balance sheet

Results

For the Company

  • Reallocated a portion of its cash to a highly-rated life insurance carrier
     

  • Maintained liquidity while earning current returns of 2% to 3% with a long-term funding vehicle to recover benefit expenses
     

For the Employees & Directors

  • Provided additional company commitment by funding long-term benefit commitments to employees and directors
     

  • Received a $500,000 life insurance benefit to help fund retirement shortfalls for employee or director beneficiaries
     

The above client case study is based on the economic results for one of TRC Financial's clients. The economics associated with each individual client are unique and impacted by the insurance product acquired, the performance of the life insurance policy, timing of premium payments, medical underwriting for the insured(s), and the actual life expectancy of the insured(s). The client case study is not intended to be opinion or advice on legal, tax, accounting or investment matters. Private counsel should be consulted prior to application of this general information to specific situations.