As a way to spice up executive compensation packages, many companies have long sought to provide top performers with enhanced versions of the basic life and disability policies they typically give to all employees. But these efforts were often stymied by insurance company limits, or by requirements that each executive get a medical examination.
Recently, however, this strategy has become more easily employed: Premiums for policies have fallen, while underwriters are offering higher guaranteed issue limits (the amount of coverage they’ll accept without medical review).
All of which means that now is an especially good time to explore ways to make your organization’s executive benefit package more appealing in order to attract, retain and reward key employees.
Here’s a quick primer to some of the most significant plans offering executive level coverage:
Executive Long-Term Disability Insurance
These plans are designed to offer senior executives more coverage than what’s provided by traditional group disability plans, which are geared towards rank-and-file employees. Traditional group policies may only cover a fraction of the executive’s total compensation and can leave them unable to maintain their lifestyle in the event of an accident or illness. Additionally, these traditional policies may not cover bonuses or incentive compensation.
Executives looking for additional coverage have the option of purchasing a supplemental policy on their own. However, there are many benefits to employer purchased or sponsored coverage. Employer sponsored long-term disability insurance policies are often guaranteed issue and do not require a medical exam. Some of the other benefits of arranging an executive disability plan are the removal certain invasive financial underwriting, portability of the policy (the executive can keep the policy even if they change employers) and discounts ranging from 25-40% on typical retail rates.
Supplemental Life Insurance
Typical group supplemental life insurance plans might not provide a meaningful amount of coverage for executive level employees. For example, these plans might generally be capped at five times salary with a maximum payout of $500,000, where $100,000 of that amount is guaranteed issue (the amount of coverage the insurer will provide without the policy holder needing to take a physical).
Employers seeking to retain and reward executives can create executive life insurance programs that provide much higher limits or cover larger multiples of salary with no caps. Executive life policies may also be structured with additional features not available more broadly. For instance, they can be combined with products that allow for the accumulation of tax advantaged cash value to pay for retirement obligations or create a golden handcuff for the executive. They can also be structured for the employer to recoup all costs related to providing the benefit. Additionally, these policies can be portable, so the executives can choose to continue the policy if they leave the company.
Business Travel Accident Insurance
We see a lot of clients purchasing additional accident insurance for senior employees who travel frequently. While relatively inexpensive—we recently secured a policy for a dozen senior executives at a company for a $5,000 annual premium —this insurance typically covers a range of worst-case scenarios ranging from sickness-related hospital stays and doctor visits to kidnap-ransom benefits. It’s a low-cost way to make senior talent feel fully protected.
Deferred Compensation and Supplemental Retirement Plans
A nonqualified deferred compensation (NQDC) plan can accumulate tax-deferred savings without being subject to some of the rules that govern other retirement vehicles, e.g., they allow contributions greater than the limits for 401(k) retirement savings plans. With an NQDC, employees can defer a larger portion of their compensation into an investment vehicle until a specific date in the future (usually 5 or 10 years). Taxes are deferred on the money until the deferral is paid.
A supplemental executive retirement plan (SERP) is a type of NQDC, but typically contributions from the employer are used to provide a retirement benefit in lieu of or to supplement a traditional pension or 401(k) plan.
Note that there are many ways to fund and structure these plans. In some cases, there can be a substantial benefit for the company to invest the deferred compensation into a life insurance policy that also accumulates a cash value. All of these approaches have advantages and drawbacks, so experienced professional advice is essential.
Of course, insurance is only one part of a comprehensive executive benefits package. Many companies are adding services to assist their top people with financial and investment issues. These include:
- Estate planning and retirement advice
- Access to investment vehicles such as hedge funds and real estate investment trusts
- Vault for personal documents
- Executive health exams
- Personal property and casualty insurance reviews
Because this corner of the compensation market is competitive and always changing, it’s important for companies to provide the most up to date benefits to their executives and, of course, ensure proper governance and compliance. With smart choices and execution, insurance can provide a much-valued tool for organizations to attract and retain the best talent in their industry.
Christopher Paul is a managing director in Crystal & Company’s San Francisco office specializing in employee benefits.
Sign up for our updates to get the latest news and analysis