Key Person Insurance

The death of a key person can result in serious consequences for your business. Credit could be substantially impaired, or even worse, loans would be called if the key person was a co-signer. The loss of that “intangible asset value” represented by the key person may be greater than that caused by a fire, flood, or other catastrophe.

When insuring a loss through death, life insurance provides an important source of revenue replacement. Further, the key person insurance program can be designed to accumulate reserves that may be used ultimately for retirement, a termination replacement, or the retraining of successors.

Golden Handcuffs

Employers invest significant resources in the hiring, training and retaining of key employees. Golden Handcuffs are financial incentives designed to help employers hold onto employees that they've invested in.

Golden Handcuffs may come in the form of lucrative commissions, generous bonuses, employee stock options, or other financial compensation; all provided to a talented employee as an incentive to keep them from moving out of the company. They are more common in tight labor markets, for jobs requiring highly specialized skills, or in industries where highly-compensated employees are likely to move from company to company.

Examples of golden handcuffs include employee stock options that do not vest until the employee has been with the company for several years, and contractual agreements that stipulate certain bonuses or other forms of compensation must be returned to the company if the employee leaves before a certain date.

Split Dollar Plans

A Split Dollar Plan is an arrangement between an employer and an employee to share the costs and benefits of a life insurance policy. These plans are widely used in gift and estate planning and can be an important part of the compensation package for key executives.

Split Dollar Plans can be used to:

• Attract, motivate and retain key executives
• Provide life insurance coverage for executives using employer funds
• Fund severance benefits
• Fund stock purchase agreements
• Fund nonqualified deferred compensation plans

Split Dollar Plans offer business owners a number of advantages, including:

• Your business’ investment in the plan is fully secured. If the insured employee dies or employment is terminated, your business is reimbursed from the policy proceeds for its payment of premiums.
• The death benefit from a Split Dollar Plan (both the employer's share and the employee’s beneficiary's share) is generally free from income tax.
• Split Dollar Plans can be customized to meet the objectives of both the employer and employees. 

Phantom Stock Plans

A Phantom Stock Plan allows employers to attract, motivate and reward their key executives with many of the benefits of stock ownership without actually giving them any company stock. Rather than receiving physical stock, the executive receives "phantom" stock. Even though it's not real, the phantom stock follows the price movement of the company's actual stock, paying out any resulting profits.

Long-Term Advantages to Executives and Employers
Phantom Stock can help in getting an executive team to think and act like equity partners. It creates a sense of ownership in the success of the business.

In addition to its incentive components, a Phantom Stock Program can provide executives with tax-deferred compensation for retirement and can act like golden handcuffs in retaining key executives through vesting requirements.

Most often used by privately-held and family-owned companies, Phantom Stock Plans can be especially useful in providing the economic benefits of equity without diluting shareholder value. Because recipients of phantom units lack voting rights, a company can issue these units without altering the governance of the company or worrying about dilution issues.