Terry Bork CLU ChFC, President   |   Aurum Insurance Services   |   D: 440-605-7230   |   C: 440-666-6032   |   tbork@auruminsurance.com   |   www.auruminsurance.com

Executive Compensation/Business Succession

I have had this small business as a client for over 25 years, and we are now entering the third generation of family ownership.  The company has grown to over 400 employees with multi-city locations.  The company has long had key employees who have contributed greatly to the growth and success of the business.

The first generation owner wanted to establish a compensation and benefit plan that would help retain these key employees, while also rewarding them for their contribution to the company’s success.

The Solution

The solution was to establish a Nonqualified Deferred Compensation Plan exclusively for the benefit of this select group of highly compensated key employees.  The company has added new participants to the plan on a regular basis over the years.

The plan rewards each participant with a retirement benefit and pre-retirement death benefit payable over 10 years.  The benefit is determined by the key employee’s average compensation adjusted over time.

The retirement benefit is vested and payable at retirement age 65, with a reduced benefit payable beginning at age 62.  To aid in retention, if the key employee leaves the company prior to the early retirement age, the benefit is forfeited.

Informal Funding And Cost Recovery

It is the companies’ responsibility to pay the promised future benefits.  The plan is unfunded, meaning no asset directly secures the future promise, and each executive’s position is that of an unsecured creditor in the case of insolvency.

To aid in benefit security, the company chose to informally fund the plan with Company Owned Life Insurance.  It acquires life insurance on the life of each participant, and names itself as beneficiary.

The life insurance is designed to remain in force for the executive’s life, and reimburse the company for the benefits paid.  Life insurance funding allows the company to pay substantial benefits to plan participants, while ultimately recovering the cost.

The cash value provides a competitive yield, and is booked on the corporate balance sheet as an asset.  It is available, if needed, to make benefit payments, or can be used for any other corporate purpose.

The End Result

The plan has been instrumental in retaining and rewarding key executives for over 25 years.  It has provided pre-retirement death benefits and retirement benefits to numerous executives over the years, and continues to do so today.

The portfolio of Company Owned Life Insurance provides protection against a premature death of a plan participant.  Policy cash value provides a source for future benefit payments, and a competitive yield on cash reserves.  In addition, death benefits paid to date have partially offset total benefits paid.

The plan has also been an important factor in ownership transition, by providing continuity and stability with the group of key executives who contribute to the company’s ongoing success.

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