A corporation wants to reward a key executive by promising retirement income to be paid later, and uses a life insurance policy to fund the obligation. This arrangement is called:
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Answer & full 3-part explanation (select an option above, or peek)
Why D is correct
In deferred compensation, the employer promises to pay an executive benefits at a later date, usually at retirement, and often funds that promise with life insurance on the executive. The employer is typically the owner and beneficiary, and the executive is taxed on benefits when they are actually received rather than when the promise is made; premiums are generally not deductible by the employer. This differs from split-dollar, which divides premiums and benefits between employer and employee, and from buy-sell funding, which finances the transfer of a deceased owner's business interest.
Why the other options are wrong
- A) Split-dollar shares the premiums, cash value, and death benefit between employer and employee; deferred compensation does not split the policy with the employee.
- B) A buy-sell agreement funds the purchase of a deceased owner's business interest at death, not retirement income for a living executive.
- C) Business overhead expense insurance pays a business's ongoing fixed expenses if the owner becomes disabled, not executive retirement benefits.
Memory hook
Deferred comp = pay the executive later, and fund the promise with life insurance now.