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:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
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.
Why the other options are wrong
- B) Salary continuation pays ongoing salary to the employee's family after death; here the benefit funds the executive's own retirement income, not survivors.
- C) Key person insurance covers the company's loss from the death of a key employee; here the executive is living and the purpose is retirement funding.
- D) Split dollar splits premiums and benefits between the employer and the employee or another party; here the employer alone owns the policy and is the beneficiary.
Memory hook
Deferred comp = employer-funded retirement promise, backed by company-owned life insurance. Fund now, pay later.