Employees are often the key to a business’s success. A top performing sales person, for example, may generate millions for a business and have access to sensitive customer lists. Retaining these employees is essential, but what can your business clients offer their key employees who already have everything? They’re already set up with a pension or profit sharing plan and supplemental nonqualified deferred compensation. They draw an impressive salary and have the best health insurance money can buy. How about offering them a plan that promises to pay their families a portion of the key employee’s salary for a period of time, say ten years? And how much more attractive is the plan if it’s receivable by the employee’s family estate tax free?

Under a DBO Plan an employer promises to make a payment, or payments, to the employee’s named beneficiaries if the employee dies while employed by, or retired from, the company. Payments to beneficiaries may be made as a one-time payment or as periodic payments. A lump sum payment may be calculated as a multiple of the employee’s annual salary (e.g. six times the employee’s annual salary). In contrast, a periodic payment obligation may be calculated as a percentage of salary and may continue for a definite period of time (e.g. an obligation to pay beneficiaries 75 percent of the employee’s salary for ten years after the employee dies.

DBO Plans are typically funded with a life insurance policy. The policy is owned by the company and the company is named beneficiary.

After the employee dies, the policy death benefit is paid to the company. Generally, the death benefit is received by the company income tax free. The company will either pay the amount of the benefits to the employee’s beneficiaries from the policy’s death benefit or invest the cash in a tax-free investment that will generate income sufficient to pay the periodic benefit.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For coverage of key employee life insurance in Advisor’s Journal, see The Key Employee Insurance Story (CC 10-34).

For in-depth analysis of another key employee benefit, the Section 162 Plan, see Advisor’s Main Library: C—Executive Bonus – I.R.C §162 Plan.

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