15 minute read
Life Insurance Creates ‘Sticky’ Employment Relationships
Carrots are more effective than sticks when it comes to retaining selected employees who are motivated to contribute their best.
By H.L. Vogl
As the economy emerges from the pandemic, attracting and retaining top talent has emerged as a high priority for businesses of all sizes and industries. Working at home and in hybrid models has loosened ties to the office and made employees more mobile, putting employers around the country in competition for top talent, wherever they live. And President Joe Biden issued an executive order asking the Federal Trade Commission (FTC) to develop regulations to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
Carrots, Not Sticks
Regardless of whatever limitations the FTC may impose on noncompete agreements, carrots are more effective than sticks when it comes to retaining employees who are motivated to contribute their best.
“Nonqualified” benefits for selected employees — with value that is conditional on extended years of service — are great ways to create “sticky” employment relationships in this highly mobile environment.
Traditional nonqualified deferred compensation plans can be challenging to administer due to the complicated requirements of Tax Code Section 409A and the Employee Retirement Income Security Act (ERISA). ey also often involve noncompete requirements that could ultimately be targeted by FTC regulations. As a result, a number of executive benefit designs using life insurance have emerged as popular, simpler alternatives.
Three Common Options For Structuring Executive Benefits
Low interest rates make “loan regime split dollar” particularly attractive today. Select key employees are given the opportunity to own a permanent life insurance policy insuring themselves, with the employer paying the premiums and booking them as loans to the employees. e employees only pay taxes on the small amount of imputed loan interest, rather than the full premiums paid.
If covered employees leave the business prematurely, they will have to pay back the loan principal to the employer and cover any future premiums owed to the insurance company out-of-pocket. ( ey may prefer to surrender the policy for its cash value to cover their repayment obligation.)
Employees who stay longterm and make continued contributions to the success of the business may be rewarded with a forgiven loan principal (in lump sum or gradually), at which time the forgiven amount is recognized as taxable
3 Ways To Structure Executive Benefits
1. Loan regime split dollar:
• An employer assists an employee in obtaining life insurance. • The employee owns the policy. • The employer arranges a loan agreement between the employee and the corporation. • The employee uses these borrowed funds to pay required premiums. • The employee then pledges the policy as collateral against the borrowed funds. • Any excess death benefit over the loaned amount is directed to the employee’s selected beneficiary.
2. Endorsement split dollar:
• The employer owns the policy. • The employer endorses a portion of the death proceeds to the employee’s beneficiary. • The employer is treated as giving “economic benefits” to the employee.
3. Bonus arrangements:
• Section 162 – The employee owns the policy and the employer pays the premiums. The premium payments are immediately treated as employee compensation, not loans. • Restricted Executive Bonus Arrangement – The employee has restricted rights over the life insurance policy for a period of time.
income. e cash value of the policy can provide liquidity to cover taxes due, and what is left can be used to supplement retirement income, cover estate planning needs and more.
Certain employers are not allowed to make loans to some employees or have more control over the life insurance policy. (Sarbanes-Oxley prohibits loans to specified executives of publicly traded companies, and some state nonprofit corporation laws prohibit loans to officers and directors.) In these cases, “endorsement split dollar” provides an alternative design. e employer owns and pays for the life insurance policy and “endorses” some of the death benefit to the employee. e employee pays tax only on the “economic benefit,” an amount roughly equivalent to the term insurance cost of the endorsed amount. If the employee leaves prematurely, the business retains the policy or surrenders it for its cash value. Similar to loan regime split dollar, the business can decide to reward long-term employees by transferring ownership of the policy to them down the road.
If the employee wants a legally enforceable right to loan forgiveness or policy ownership at some time in the future, that type of split-dollar arrangement is considered deferred compensation subject to Section 409A requirements. Typically, these arrangements will be designed to use the “short-term deferral exception” and provide income recognition within two and a half months after the year in which that right vests.
For employers more interested in taking an immediate deduction for premiums paid, a “Section 162 bonus” arrangement may be preferred. Here, the employee owns the policy and the employer pays the premiums, but those premium payments are immediately treated as compensation to the employee, not loans. Since the employee is recognizing the income, the employer takes a corresponding deduction. is is particularly attractive for “pass-through” entities with nonowner key employees, since the owner is typically in a higher tax bracket than the employee.
Employers retain less control over Section 162 arrangements, but they can still maintain some “stickiness” with a Restricted Executive Bonus Arrangement. e REBA is an agreement to restrict the employee’s rights over the life insurance policy — particularly access to the cash value — for a period of time. A REBA may establish a vesting schedule, but employers need to watch out for terms that unintentionally bring the arrangement under requirements of ERISA or the split-dollar regulations. In all of these situations, competent legal and tax advisors should be consulted regarding the design and documentation of these benefits.
Life Insurance Enhances Value
e protective value of life insurance is an integral part of all of these arrangements. Long-term care riders or hybrid policies may also be utilized to provide additional protection benefits. For key employees with life insurance underwriting challenges, a number of insurance carriers offer simplified or guaranteed issue for employer-owned or -sponsored policies that cover a minimum number of qualified employees.
You can demonstrate your value as an insurance professional by bringing these ideas to your business owner clients. Working with an advanced insurance sales team enhances your ability to explain these options to your clients and coordinate with their tax and legal advisors to implement.
H.L. Vogl, JD, CFP, is director, advanced sales, Crump Life Insurance Services. They may be contacted at hl.vogl@ innfeedback.com.
INTRODUCING JOHN HANCOCK’S ALL-NEW PROTECTION VUL Meeting market demand
by offering customers potential value throughout the life of their policy
As more life insurance customers seek a carefully balanced blend of security and opportunity, John Hancock is now offering its all-new Protection VUL, (a variable universal life insurance product).
With an age-100 death benefit guarantee, a full range of investment options and attractive living benefits, Protection VUL can help your clients meet their long-term goals for financial security and growth. When Protection VUL customers pair their policy with the innovative John Hancock Vitality Program, they also gain access to tools, resources, incentives and rewards to help them live longer, healthier lives, including the chance to lower their guaranteed premium by up to 25% over the life of their policy.1
The new Protection VUL complements John Hancock’s portfolio of protectionfocused products, which continue to offer an attractive combination of strong guarantees, competitive premiums and cash value growth potential. Now, Protection VUL stands out for those seeking even stronger guarantees and consumer value, giving it traction against market leaders.
“Our ‘Protection’ portfolio reflects our mission to provide long-term value through a variety of options that help customers address their specific goals,” said Neal Kerins, Vice President, Product Development, John Hancock Insurance. “By providing access to the equity market and a competitive
guarantee to age 100, Protection VUL offers a blend of security and opportunity we believe will appeal to many of today’s consumers.”
Protection VUL is an effective option for your insurance clients ages 35 and older who are looking for a balance of cost-effective, guaranteed death benefit protection with equity-market growth potential. With optional riders for long-term care and critical illness, Protection VUL also offers comprehensive living-benefit coverage for added financial protection against the unexpected. Additionally, customers who chose to engage in the Vitality program can improve their overall health and earn savings and other rewards — additional sources of potential value to be realized over an insured’s lifetime.
There are two versions of Vitality that your clients can choose from — Vitality PLUS (available for as little as $2/mo.) and Vitality GO (no additional cost) — each offering different levels of rewards and resources to match clients’ needs, goals and interests. When added to a Protection VUL policy, in addition to the opportunity to lower the guaranteed premium by as
much as 25%1, participation in Vitality PLUS also offers: • Choice of discounted or complimentary wearable fitness device • Savings on eligible healthy foods at the grocery store • Exclusive discounts from Hotels.com • Discounts from popular retailers • And much more!
“There has never been a more important time for customers to take control of their financial and physical health,” added Mr. Kerins. “The new Protection VUL with John Hancock’s engaging Vitality program gives customers that exact opportunity. We fully expect to see thousands of Protection VUL customers take advantage of Vitality to realize significant premium savings and other rewards for their everyday healthy activities like regular exercise and restful sleep.”
Learn more
To speak with a John Hancock sales representative about selling Protection VUL or any of their other innovative products, call 888-266-7498 and select option 2.
1. Premium savings are in comparison to the same John Hancock life insurance policy without Vitality PLUS. The level of premium savings is cumulative over the life of the policy and will vary based upon underwriting status, issue age, policy type, the terms of the policy and the Vitality Status achieved. Premiums savings are only available with Vitality PLUS. Variable universal life insurance has annual fees and expenses associated with it in addition to life insurance related charges (which differ with the product chosen), including surrender charges and investment management fees. Variable universal life insurance products are long-term contracts and are sold by prospectus. They are subject to market risk due to the underlying sub-accounts, and are unsuitable as a short term savings vehicle. The primary purpose of variable universal life insurance is to provide lifetime protection against economic loss due to the death of the insured person. Cash values are not guaranteed if the client is invested in the investment accounts. There are risks associated with each investment option, and the policy may lose value. Please contact 1-800-827-4546 to obtain product and fund prospectuses The prospectuses contain complete details on investment objectives, risks, fees, charges and expenses as well as other information about the investment company. Please read the prospectuses carefully containing this and other information on the product and the underlying portfolios and consider these factors carefully before investing.
Insurance policies and/or associated riders and features may not be available in all states. Protection VUL is not available in New York. Some riders may have additional fees and expenses associated with them. Refer to the product prospectus for additional information. Vitality is the provider of the John Hancock Vitality Program in connection with policies issued by John Hancock. Vitality Rewards may vary based on the type of insurance policy purchased for the insured (Vitality Program Member) and the state where the insurance policy was issued. John Hancock Vitality Program rewards and discounts are only available to the person insured under the eligible life insurance policy. Rewards and discounts are subject to change and are not guaranteed to remain the same for the life of the policy. HealthyFood savings are based on qualifying purchases and may vary based on the terms of the John Hancock Vitality program. The HealthyFood program is currently not available in Guam. Protection VUL policies automatically include a no-lapse guarantee called Death Benefit Protection. This feature guarantees that the policy will not default, even if the cash surrender value falls to zero or below, provided that the Death Benefit Protection Value remains greater than zero and policy debt never exceeds the Policy Value. Once terminated, the Death Benefit Protection feature cannot be reinstated. See the product guide for additional details. Guaranteed product features are dependent upon minimum-premium requirements and the claims-paying ability of the issuer. Products or services offered under the Vitality Program are not insurance and are subject to change. There may be additional costs associated with these products or services and there are additional requirements associated with participation in the program. For more information, please contact the company at JohnHancockInsurance.com or via telephone at 888-333-2659. The life insurance policy describes coverage under the policy, exclusions and limitations, what must be done to keep the policy in force, and what would cause the policy to be discontinued. Please contact John Hancock for more information. Insurance products are issued by: John Hancock Life Insurance Company (U.S.A.), Boston, MA 02210 (not licensed in New York) and John Hancock Life Insurance Company of New York, Valhalla, NY 10595, and securities are offered through John Hancock Distributors LLC through other broker/dealers that have a selling agreement with John Hancock Distributors LLC, 197 Clarendon Street, Boston, MA 02117. Policy Form Series: 21PROVUL, ICC21 21PROVUL Rider Form Series: 20HER; ICC20 20HER, 18VCR; ICC18 18VCR MLINY060321715-1
States Embracing New Annuity Sales Rules
Sixteen states had passed new annuity sales rules as this issue went to press, and 16 is an important number for an industry that needs that number to grow.
Connecticut became the 16th state to pass regulations or legislation based on a model rule by the National Association for Insurance Commissioners.
In February 2020, the NAIC adopted an update to the Suitability in Annuity Transactions rule that articulates a best-interest standard through the fol-
lowing four obligations: care, disclosure, conflict of interest and documen-
tation. With the outbreak of COVID-19, states were slow to adopt the update in the months that followed.
The NAIC began lobbying state officials last summer, and they completed a series of FAQs to help facilitate adoption.
Industry trade groups hope to see about half the states adopt the new rules by the end of the year. Doing so will help establish momentum for a reasonable bestinterest standard annuity producers can live with over tough fiduciary rules.
ANNUITIES MAKE IT EASIER FOR SENIORS TO SPEND, REPORT FINDS
Having the peace of mind that comes with guaranteed income is giving seniors a license to spend, a new study found. The study, by David Blanchett and Michael S. Finke, examined spending in retirement by comparing retirees with a lifelong income stream to those living off an investment portfolio. e findings suggest retirees with
guaranteed income may spend twice as much as those tapping wealth from their retirement savings.
“ e size of the effect suggests that the explanation for under spending non-annuitized savings is likely both a behavioral and a rational response to longevity risk,” the authors wrote in an abstract.
About 67% of private industry work-
ers had access to retirement plans in
2020, according to the Bureau of Labor Statistics. But many new retirees struggled to convert that nest egg into a retirement spending plan.
BEST’S: LIFE/ANNUITY COMPANIES REDUCE LEVERAGE, IMPROVE LIQUIDITY
The prolonged low interest rate environment is allowing publicly traded life/annuity insurers to strengthen their balance sheets by replacing higher-cost debt with often significantly lower-cost alternatives, AM Best reported.
Source: CNBC
The aggregate unadjusted total debt-to-capital ratio for the 16 publicly traded L/A insurers followed for the report declined since 2011, to 24.1% at year-end 2020.
Total debt outstanding decreased by approximately $8 billion (or 8.1%) to $91.4 billion at year-end 2020.
In 2020, the financial leverage of a significant portion of the publicly traded companies declined to its lowest unadjusted level of the past 10 years.
QUOTABLE
Older workers are undersaved and regret that they have not saved more or wish they had started saving earlier.
— Frank O’Connor, vice president, Research and Outreach, Insured Retirement Institute
The overall decline in debt-to-capital ratios can be attributed to the indus-
try’s record-high capitalization, the report noted.
Given the current interest rate environment and some uncertain views of the U.S. economy, many of the larger companies continue to deleverage. In 2020, Prudential reduced its total debt obligations by $6.3 billion, the largest dollar decrease of all the companies.
PENNSYLVANIA AMENDS ANNUITY TERMS TO ENTICE TEACHERS
Pennsylvania education officials are amending retirement plan and annuity terms to help address a public teacher shortage in the state.
A bill recently signed into law aims to
attract teachers by extending the sunset on the pension code to allow retired teachers to return to teaching
in subject shortage areas. They can do so without impairing their retirement status or retirement annuity from June 30, 2021, to no later than June 30, 2024.
“The teacher shortage is a serious and well-known crisis throughout the state,” said Sen. Dale Fowler. “This legislation helps districts that have a subject shortage by giving them the option to fill those positions with a retired teacher. It also ensures that retired teachers who want to come back and help aren’t punished for that decision.”
Sen. Dale Fowler
DID YOU KNOW ?
Sixty-one percent of retirees wish they had done better at planning for the financial aspects of their retirement. Source: Edward Jones
