Increasingly it’s become an important part of the CEO pay structure leaving advisors with a relatively inexpensive option to market to business owners
A Connecticut advisor who specializes in sophisticated insurance solutions has collected research from more than 500 business owners that suggests leveraged life insurance can be an inexpensive way for the company to defer compensation while meeting the long-term retirement needs of the CEO.
“Using bank loans to finance the life insurance can be an effective approach for some companies. Depending on the arrangement between the senior executives who are participating in the plan and the company, coupled with tax deferred growth provided by using life insurance, the out of pocket costs can be very small,” Frank Seneco, president of the advanced planning boutique Seneco & Associates told Forbes writer Russ Alan Prince recently. “A floor can be put in place to control the downside risk making the leverage in the form of a bank loan – especially in a low interest rate environment – very effective.”
Large public companies are using life insurance to supplement other deferred compensation arrangements but the idea certainly extends to private companies as well.
General Electric, for instance, has paid over $1.5 million in policy premiums (including $314,000 in 2014) for CEO Jeffrey Immelt that would pay out $22 million to Immelt’s beneficiaries should he die.
While GE is a massive company and doesn’t need to borrow to pay those premiums, if a company were to do so it could get millions in protection for less than $20,000 in annual interest. That’s a pretty good use of leverage especially for growing companies in need of cheaper capital.
“The advantages for the senior executives include a meaningful death benefit and possibly considerable cash for retirement or other needs such as medical care,” Seneco told Forbes. “There are various different financial approaches senior management should consider with respect to creating benefits for highly compensated employees. This approach is just one possibility.”
For advisors this is potentially a very lucrative niche segment capable of generating significant premiums from the appropriate clients. Now you just have to find them.
See more: Life insurance to blame for CEO compensation?
“Using bank loans to finance the life insurance can be an effective approach for some companies. Depending on the arrangement between the senior executives who are participating in the plan and the company, coupled with tax deferred growth provided by using life insurance, the out of pocket costs can be very small,” Frank Seneco, president of the advanced planning boutique Seneco & Associates told Forbes writer Russ Alan Prince recently. “A floor can be put in place to control the downside risk making the leverage in the form of a bank loan – especially in a low interest rate environment – very effective.”
Large public companies are using life insurance to supplement other deferred compensation arrangements but the idea certainly extends to private companies as well.
General Electric, for instance, has paid over $1.5 million in policy premiums (including $314,000 in 2014) for CEO Jeffrey Immelt that would pay out $22 million to Immelt’s beneficiaries should he die.
While GE is a massive company and doesn’t need to borrow to pay those premiums, if a company were to do so it could get millions in protection for less than $20,000 in annual interest. That’s a pretty good use of leverage especially for growing companies in need of cheaper capital.
“The advantages for the senior executives include a meaningful death benefit and possibly considerable cash for retirement or other needs such as medical care,” Seneco told Forbes. “There are various different financial approaches senior management should consider with respect to creating benefits for highly compensated employees. This approach is just one possibility.”
For advisors this is potentially a very lucrative niche segment capable of generating significant premiums from the appropriate clients. Now you just have to find them.
See more: Life insurance to blame for CEO compensation?
