Despite the high national unemployment rate, a hiring survey reveals that there are often shortages of qualified candidates to fill positions in certain fields. Engineers, IT experts, and executives (or top managers) are all on the list of professionals with sought-after skill sets. In addition, 60% of employers expect voluntary employee turnover to increase as the economy and job market continue to improve.¹
Thus, it could prove difficult and expensive for businesses to replace experienced workers who decide to leave. By some estimates, replacing managerial and professional employees could cost as much as 150% to 200% of their annual salaries.²
Here’s how an executive bonus plan funded with cash-value life insurance could possibly be used to reward and help retain your most valuable employees.
Incentive to Stay
Business owners may appreciate that an executive bonus plan is typically easier to adopt and more flexible than some other types of employee benefits. The premiums are paid by the business with bonuses that are tax deductible to the employer but taxable to the employees. The company determines the amount of each bonus and when to pay it, so the timing of the expense can be controlled.
An executive bonus plan may also be designed with certain restrictions and vesting requirements that make the life insurance policy more valuable for an employee who remains with the company.
The employee owns the policy and also bears the responsibility to keep it in force. He or she can borrow against, and sometimes withdraw from, the cash value if needed for emergencies, to pay college tuition, to help fund retirement, or for any purpose. If the policy is in force at the time of death, the employee’s named beneficiaries will receive the death benefit, minus any outstanding loans, free of income taxes.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that the individuals for whom you are purchasing the policies are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.
For more information on this topic please contact Ben Borden Richmond, Va Financial Advisor, (804) 282-8820.
1) Mercer, 2012 2) Wharton School of the University of Pennsylvania, 2012
According to a recent Wall Street Journal poll, 76% of uninsured Americans don’t understand the Affordable Care Act or how it will affect them.1
Nearly 48 million uninsured Americans may need to start preparing and budgeting for upcoming changes because all citizens and legal residents are required to have health coverage beginning in 2014 or pay a tax penalty.2 Open enrollment in the government’s new Health Insurance Marketplace is expected to begin on October 1, 2013, and run through March 2014.3 The marketplace should make it easier to compare coverage options based on cost, benefits, quality, and other features.
The health insurance mandate was intended to add healthy individuals to the insurance pool and counterbalance a provision that prohibits insurers from excluding people with pre-existing conditions. If you already have affordable health benefits through an employer — or qualify for coverage through a government program such as Medicare or Medicaid — you should not be affected by the upcoming marketplace changes.4
The penalty for not having health insurance will be phased in over three years, beginning at a flat $95 per adult or 1% of income (whichever is greater) in 2014. The penalty rises to the greater of $325 or 2% of income in 2015 and the greater of $695 or 2.5% of income in 2016, after which it will be indexed for inflation. Taxpayers will also incur the penalty for each dependent who does not have coverage, although minors (under age 18) trigger only 50% of the penalty.
The government’s Health Insurance Marketplace forms a larger risk pool and could make coverage from private insurers more affordable for many individuals who are not covered by group plans. Consumers can shop for suitable plans online and apply for subsidies toward the cost of premiums. The federal government will operate or help run exchanges for 36 states, and 14 states have launched their own.5
Available plans include four tiers of coverage ranging from minimal (least expensive) to robust. Plans are standardized based on the percentage of expected health-care costs insurers will cover: bronze (which pays 60% of the actuarial value of expenses), silver (70%), gold (80%), and platinum (90%).
Families with incomes between 100% and 400% of the federal poverty level may be eligible for a subsidy. Households making up to nearly $47,000 for a single person or $94,000 for a family of four could receive a premium reduction or tax credit on a sliding scale, but only for a silver plan purchased through a health insurance exchange.6–7
Starting in 2014, health plans (inside or outside the exchanges) must cover 10 “essential benefits” including doctor visits, preventive care, hospitalization, mental health, and prescriptions. Insurers can no longer deny coverage or charge higher premiums because of a person’s health history.
Health plan premiums will vary based on four characteristics: age, family size, geographic area, and tobacco use, within certain limits. Older consumers (ages 50–64) may be charged no more than three times the average premium paid by a 21-year-old (currently this older group pays an average of five times more). Smokers could be charged up to 50% more than nonsmokers.8
Self-employed workers, early retirees (under age 65), pre-retirees who want to change jobs or start businesses, and people who have suffered serious or chronic health conditions are among the groups most likely to see better coverage and/or savings in premium costs. Women, who were often charged more than men in the past, may also benefit.9
In addition, residents of states that have required insurers to offer relatively comprehensive plans in the past (such as California and New York) may see lower premiums when insurance is bought from a state-based exchange. In lightly regulated states (such as Ohio, Florida, and South Carolina), coverage must be adjusted to meet federal requirements, which means residents could face higher premiums than they did before.10
For more information or to apply for coverage, visit HealthCare.gov. Individual health plans are also offered in the traditional market, with or without the help of a broker. An approved broker might also be able to help you buy a policy from an exchange.
1) The Wall Street Journal, September 16, 2013 2, 6) U.S. Census Bureau, 2013 3–4) Associated Press, September 12, 2012 5, 7) The Wall Street Journal, August 30, 2013 8) The Wall Street Journal, September 8, 2013 9) MSNMoney, September 11, 2013 10) CNNMoney, August 6, 2013
Annuva Financial is an advisor based in Virginia providing retirement income advice to baby boomers.