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Case Study: Retaining Key Employees with VUL and a Special Bonus Plan

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Ongoing success for many small companies rests in their ability to retain key employees. Employers rely on their hard work, knowledge of the business and loyalty to keep the business thriving. To return that loyalty and keep these key employees with the company, many employers know they must offer more than just salary. One very effective fringe benefit that is growing in popularity is a restrictive executive bonus arrangement. Scott Hayden, an agent in northern California with New York Life Insurance Company and Registered Representative of NYLIFE Securities LLC, Member FINRA/SIPC, (A Licensed Insurance Agency) recently implemented this arrangement using variable universal life policies (VUL) to put "golden handcuffs" on two key employees for one of his clients.

A variable universal life policy is flexible and fulfills life insurance protection needs while offering cash value accumulation. There are risks associated with investing in a variable life insurance policy. Please be aware that assets allocated to the investment divisions are subject to market risks and will fluctuate in value.

Hayden's client is a northern California corporation in a highly competitive market and it's fairly commonplace for employees to jump from company to company. The two key employees the client wanted to retain were his vice president of sales and marketing and his vice president of land acquisition. During a review of the client's needs Scott asked the question, "What would you like to offer your key employees?" After showing his client the options available using qualified plans, and non-qualified plans (i.e. deferred compensation plans), Scott recommended the restrictive executive bonus arrangement.

Traditional qualified plans weren't the answer because they were too expensive and did not allow Hayden's client to select among employees. Non-qualified plans subject the employees' benefits to claims of the business's creditors and do not allow the employer to deduct the cost of the plan until disbursement to the employee. The client had also thought about simply increasing compensation for these key employees but realized that strategy would only be effective until a higher bidder comes along.

Scott's client liked that the restrictive executive bonus arrangement permits selectivity, offers the employer current income tax deductions, provides the employee's benefits with protection from potential business creditors and works as golden handcuffs.

As Hayden explained to his client the restrictive executive bonus arrangement has three distinct components. The first is the 162 Bonus plan (so named because it refers to Section 162 of the Internal Revenue Code. It is also called an "executive bonus arrangement."). This plan allows the employer to select the employees who will receive the benefits and determine the amounts of the bonuses. Scott recommended, and his client agreed, that the bonus for each employee would be used to fund a variable universal life policy for each employee. The employer pays the premiums on a life insurance policy applied for and owned by each of the key employees. The premium is included in the compensation of the employee and he pays income and employee taxes on it. The premium bonus is generally deductible to the employer as compensation to the employee. The policy protects the employee's heirs with its life insurance and the potential to build cash value the employee can access after the restrictive period ends (as discussed below).

Scott's client decided to use NYLIAC's variable universal life policy for several key reasons. First is the product's flexibility, which enables the policyowner to increase or decrease premiums or coverage, add or delete riders (subject to underwriting and/or surrender charge), and change investment options. Premiums are subject to certain minimum and maximum amounts. To prevent the policy from terminating, the policy’s cash surrender value must be sufficient to pay the policy’s monthly charges.

Please keep in mind that insurability is necessary to utilize a permanent life insurance policy to fund the restrictive executive bonus arrangement.

The policy has several professionally managed investment divisions, giving the policyowner a wide range of choices. Third, the money accumulated in those divisions grows tax deferred.

And last because it is a universal life product, the client can "overfund" the policy, pay up to the guideline single premium to enable cash value to potentially accumulate faster.

"It is an excellent product that can work effectively in these situations," notes Hayden.

The second component is a form of employment contract. This is a separate legal agreement between the employer and the employee that can help secure the availability of the employee's services for an agreed upon period of time. It also provides the golden handcuffs through a schedule under the bonus arrangement that requires the employee work for the employer until some defined point in the future.

The third part of the plan is the restrictive endorsement. The endorsement is executed by the employer and employee and filed with the insurance company. For a specified period of time agreed to by the employer and the employee, the endorsement restricts some of the employee's ownership rights in the policy. During the restricted period, the endorsement restricts the right of the employee to surrender the policy, take withdrawals from the policy, assign the policy as collateral, change ownership or make a policy loan, unless the employer also agrees. Scott made it clear to his client that the endorsement didn't give the business any rights in the policy, only the right to participate in decisions for a limited amount of time that affect the employee's rights to policy. The restrictive endorsement is designed to expire at a defined point usually between 5-15 years. In this case the restrictive endorsement was for 10 years.

The builder held a meeting with the two key employees and told them he would like to offer this benefit to them because of all they had done for the company. He told them the arrangements are specifically designed for them to protect their heirs and advised them that the life insurance policies can potentially build cash value on a tax deferred basis that would be available to supplement retirement income through withdrawals, then loans. Both employees enthusiastically accepted the arrangements.

Loans and withdrawals will reduce the policy's cash value and death benefit.

If you are seeking ways to retain key employees, the restrictive executive bonus arrangement funded through a permanent life insurance policy may be the answer.

Note: Restrictive executive bonus arrangements must be constructed with help from qualified legal and tax advisers. These are complex arrangements and may not be suitable for all employees.

The NYLIAC Variable Universal Life insurance policy is issued by New York Life Insurance and Annuity Corporation (A Delaware Corporation) and distributed by NYLIFE Distributors LLC (Member FINRA/SIPC). The NYLIAC Variable Universal Life is sold by prospectus. Investors are asked to consider the investment objectives, risks, charges and expenses. Both the product prospectus and the underlying fund prospectuses contain this and other information about the product and underlying investment options. Please read the prospectus carefully before investing or sending money. For a NYLIAC Variable Universal Life prospectus, contact your NYLIFE Securities LLC registered representative or call 1-800-598-2019 to request a copy by mail.

This material is being provided for informational purposes only. Neither New York Life nor its agents provide legal, tax or accounting advice. Please contact your own advisors for legal, tax and accounting advice.

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Case Study: Retaining Key Employees with VUL and a Special Bonus Plan

CONSULT A REP NEAR YOU

Please complete and send the form below and we'll have a New York Life Registered Representative in your area contact you at your convenience.

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