Deferred Compensation
An agreement to pay an employee income after retirement, funded informally with life insurance, with no current taxation because the employee has no secured right to funds.
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Practice This Concept
An employer wants to fund a retirement benefit for a key executive by purchasing life insurance on the executive. Under a nonqualified deferred compensation arrangement, the employer typically:
Owns the policy, is the beneficiary, and pays the executive deferred compensation from its own funds at retirement — In a nonqualified deferred compensation plan, the employer owns the life insurance policy and is the beneficiary. The employer pays the premiums and later pays the promised deferred compensation to the executive out of the employer's own funds (funded by the policy's cash value or death benefit). The employer's obligation is unfunded in the legal sense - the executive has no current tax liability and no secured right to the policy.
National insurance concept
An employer wants to provide supplemental retirement income to a valued executive using life insurance. The company owns and pays for the policy, and the death benefit is payable to the company. This arrangement is best described as:
Deferred compensation funded with life insurance — In a deferred compensation plan, the employer promises to pay the executive benefits later, typically at retirement, and life insurance may be used to fund that obligation. The employer owns the policy, pays the premiums, and is the beneficiary; the policy's cash value builds tax-deferred to fund the future benefit. This differs from key person insurance, which protects the company against the death of a vital employee, and from salary continuation, which provides continuing pay to surviving dependents. Under split dollar, the employer and the employee or a third party share the policy's premiums and benefits.
National insurance concept
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