| LIFE
INSURANCE
Life and Accidental
Death & Dismemberment
A group life insurance
plan provides coverage for a group of employees under a group contract
held by the employer. If the plan qualifies under Code section 79,
the costs of the first $50,000 of insurance is tax free to the employees.
Group life insurance is usually set up as term coverage according
to one of the following standard policies:
- Flat Benefit Amount
- Salary Schedule
- Class Schedule
Alternative Life
Insurance Plans – Carve Out For Executives
Executives covered under a company’s group life insurance
plan can often obtain benefits by being removed from the group plan
and given separate individual policies provided by the employer.
Removing executives from a group plan does not alter the qualified
status of the group life plan for the remaining employees.
| |
GROUP
TERM |
CARVE
OUT |
| Income tax
to employees |
First $50,000 of
insurance is income tax free. |
All coverage is
taxable at the lower of PS58 rates or insurer’s term rate. |
| Premium
deductibility to the corporation |
Fully. |
Depending on the
goals of the corporation and the way that the insurance is set
up, deductibility values. |
| Cost to
corporation |
Increases as group
ages. |
Most plans are level
premium contracts. |
| Non-discrimination
coverage requirements |
Section 79 requirements
apply. If these are not met, key employees lose $50,000 exemption. |
None. |
| Benefit
non-discrimination requirements |
Section 79 requirements
apply. Generally benefits must be uniform percentage of compensation
for all participants. |
None. Coverage can
vary from executive to executive. |
| Underwriting |
Group underwriting
depending on size of group and is usually guaranteed issue. |
Medically underwritten
for each individual. |
| Treatment
as retirement |
Usually terminates
or is reduced sharply due to increasing employer costs. |
Can be continued
beyond retirement with no increased employer cost. Employee
costs remains equal to the PS58 costs. |
| Use of cash
value/permanent insurance |
May result in unfavorable
taxation to covered employees. |
Enhances plan flexibility. |
DISABILITY INSURANCE
Disability insurance
was developed to protect the employee’s income in the event
of a disabling sickness or injury.
Short Term Disability
Insurance (STD)
The STD Plan continues an employee’s salary during periods
of illness or other disabilities for a limited time usually extending
for approximately six months. The plan protects a percentage of
the employee’s weekly income and is normally designed with
four guidelines:
1. Percentage of coverage
2. Date coverage begins due to accident
3. Date coverage begins due to sickness
4. Duration of coverage
Long Term Disability
Insurance (LTD)
The LTD plan also provides income to employees who are disabled
due to injury or sickness. The LTD plan is designed to supplement
Social Security and is usually payable for the duration of the disability,
to age 65, or until death. LTD protects a percentage of the employee’s
monthly salary. Many times, the LTD plan is coordinated with the
STD plan so that there is continuous coverage.
All LTD contracts differ.
It is important to make sure that the LTD contract addresses the
following:
| |
•
Maximum Monthly Benefits |
|
•
Integration with Social Security |
| |
• Elimination
Period |
|
• Survivor
Benefit |
| |
• Benefit
Period |
|
• Cost
of Living |
| |
• Definition
of Disability |
|
• Conversion |
| |
• Own
Occupation Protection |
|
• Rehabilitation |
| |
• Residual/Partial |
|
• Rate
Guarantee |
| |
• Zero
Day Residual |
|
• Pregnancy
Coverage |
| |
• Trial
Work Days |
|
• Pre-existing
Conditions |
| |
• Return
to Work Adjustment |
|
• Mental
& Substance Abuse Disorders |
| |
• Residual
Indexing |
|
• Definition
of Prior Earnings |
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