What is the perfect employee benefit plan?
Is it one whose cost is so low, that if given as a salary increase the employee would scoff at it, but whose benefit is so great that the employee will cherish it?
That sounds pretty good for starters. But is it possible...and if it is, can you, as a life insurance agent make any money if it's sold?
It is possible and you can make money. It is so simple that the newest agent trying to break into the business market can master the presentation and technicalities in less than an hour, and the experienced agent will find it refreshingly effective and profitable.
In the vernacular of our business it's called a Death Benefit Only (DBO) plan. But, forget you ever heard that because DBO is hardly an appealing moniker.
I can't take the credit for this idea. I picked it up at a recent InsMark meeting. I've long been a fan of InsMark's proposal system. Bob Ritter, InsMark's founder, was first a life insurance agent and secondly a proposal/software wizard and successful business man.
Here's the story Bob uses to make this incredibly simple business sale:
'Mr. Employer, assume that you had a very good mid-line manager earning $50,000 per year. You want to do something especially nice for him, so you ask him and his wife to join you and your spouse at dinner at a very fine restaurant. Toward the end of the evening, as you are all enjoying your decaffeinated cappuccinos, you decide to make your grand presentation.
'You tell Fred, the 35-year old, $50,000 per year manager, how important he is to you and your firm, so you want to do something especially nice for him...to give him something that only your most valued executives will receive. Fred and his wife are poised on the edges of their chairs, waiting for your pronouncement when you spring it on him, 'Fred, we're going to give you a $100 monthly increase in salary!''
What do you suppose Fred's reaction would be? The minute he got home he'd start updating his resume. If this 2% raise of $100 (less than $30.00 after tax each semi-monthly pay period) is his thanks for doing a great job, it's time to start looking for another opportunity.
Of course, no employer would make such a dumb move. If they only had $100 to spend they certainly wouldn't make a big deal of it...unless....
Now let's assume exactly the same scenario, but this time as the pumped up Fred anxiously awaits his special recognition, Mr. Employer says the following: 'Fred, we know how important your family is to you, so we want to provide you with some extra security. If you were to die while you're employed by us, we're going to put your wife, Mary, on the payroll for one-half of what you're currently making. We'll pay her $25,000 per year and we'll keep that payment up for 20 years. Only, Mary won't have to come to work. She won't have to do anything for her $25,000 of annual salary.'
Now, what would Fred's reaction be? 'Wow, what a great benefit!' And what would Mary's reaction be if Fred later decided to leave for another job? 'Are they going to pay me if something happens to you?'
How does this benefit plan work and how is it funded? It's quite simple. If Fred Employee dies while working for the current employer, the $25,000 annual payment to Fred's widow will be taxable to her as ordinary income and deductible to the Corporation as a reasonable business expense (assuming the plan has been properly documented prior to Fred's death and it is in consideration for his services as an employee during his lifetime).
The employer will want to know the lump sum required to fund this benefit at Fred's death. In order to determine this sum, we need only to know the amount of the desired benefit; the duration it is to be paid; the corporate tax bracket and the amount of interest the corporation can earn on the funds being reserved for the benefit payout.
In our example the benefit is $25,000 per year for 20 years. The Corporation is in a state and federal combined 40% tax bracket and they tell us they can earn 6% after tax on investment income. The InsMark program tells us that $218,876 is needed to fund this benefit. Refer to Exhibit A to verify that this sum, paid out after-tax at 6% interest will be exactly the correct amount to fund the desired benefit.
The only financial instrument available that will guarantee this $218,876 exactly when it is needed is life insurance. So, the Corporation applies for a key person life insurance policy on Fred's life naming themselves as owner and beneficiary. Frankly, any life insurance policy will work for this plan, but we especially like United of Omaha's Priority Design Universal Life.
Priority Design has two unique features that especially suit it to this type of sale: Unisex rates available for employee benefit plans and an inflation rider to accommodate salary increases which might result in a benefit increase. Exhibit B shows the basic illustration underlying this sale. Worthy of note is the fact that new first year commissions are paid on the increases which take place every two years during the first ten years.
An employer objection which may be encountered is the fact that the premium is not tax deductible whereas a salary increase for the same amount would be. That's true, but a salary increase currently would also carry the added costs of payroll taxes and workers compensation. Besides, at Fred's age 65 when he retires and this benefit terminates, the employer pockets the policy cash value which in most instances returns more than his cost. And, remember, the great appeal of this plan is that its cost is so low, used as a salary increase it would be laughed at.
Before you toss this aside as too insignificant a sale to bother with, consider the employer with ten to fifty key employees who bites on the concept for all these key people. Call us for help on your prospects for this perfect employee benefit plan.