Filed Under:Life Insurance, Life Planning Strategies

Life insurance: a top funding vehicle in executive comp plans

Seventy-three percent of respondents use company-owned life insurance to fund NQDC plans.
Seventy-three percent of respondents use company-owned life insurance to fund NQDC plans.

More than seven in 10 businesses use life insurance to fund their non-qualified compensation packages for key executives, according to a new report.

The Newport Group discloses this finding in the 2014/2-15 edition of “Executive Benefits: A Survey of Current Trends.” The report examines how America’s largest companies (those with $1 billion-plus in annual revenue) are providing executive benefits, particularly non-qualified deferred compensation (NQDC) and supplement executive retirement plans (SERPs). The research also reveals how these plans are commonly structured, funded and administered.

The survey shows that 73 percent of respondents use company-owned permanent life insurance or COLI (variable, whole or universal) to fund their NQDC plans for key executives. An even higher percentage (82 percent) use life insurance to fund SERPs.

Fewer of the survey respondents, as the following table indicates, set aside other investment vehicles to pay for executive compensation packages:

Type of asset set aside for funding

NQDC Plan

DB SERP Plan

COLI

73%

82%

Mutual funds

39%

41%

Bonds

14%

18%

Company stock

13%

0%

Separately managed investment account

11%

6%

Company-owned life insurance (COLI) and mutual funds continue to be the primary asset types used to fund both NQDC plans and defined benefit SERPs,” the report states. “While sponsors typically employ ‘variable’ COLI to hedge the variable benefits of deferral plans, plan sponsors of defined benefit SERPs often use ‘general account’ insurance (whole or universal life) when insurance is used to fund SERP benefit liabilities.

“This reflects the ability to match the predictable expense structure of defined benefit SERPs with the relatively predictable earnings and beneficial accounting treatment of an insurance company’s general account investment portfolio,” the report adds.

Of the companies surveyed, 71 percent report that their NQDC plans are informally funded (pre-funding the plans using life insurance or other investing vehicle, as opposed to paying benefits as they come due when formally funding). In respect to SERPs, 55 percent of survey respondents informally fund these plans.

To segregate informally funded assets, nearly nine in 10 companies (88 percent) use a grantor “rabbi” trust, a type of trust used to defer taxation of non-qualified compensation due an executive. This compares to 71 percent of SERPs that use such trusts.

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