Have you covered your risks?
As you make investments, you want to ensure you’ve done everything to protect that investment, including key persons, against risks that could negatively affect a successful transaction. Executive benefits are designed to benefit and protect the buyer and seller in a transaction.
- Protect against loss of key persons during an acquisition
- Covers debt or investment
- Offers cushion for replacement costs
Key person solutions
Retaining top talent during an acquisition is a major priority, especially members of the executive staff. Executive benefits are designed to provide top employees with a higher level of benefits and compensation, especially since 401(k)s restrict the amount of money an individual can contribute on a tax-favored basis.
Executive benefits can be designed to provide tax advantages for both the employee and the key employee.
Benefits to buyer
- Business is protected if the key person is lost. The cushion of tax-free dollars received could be used to recruit a new person and cover potential losses during the transition.
- If the key person were to leave, the business can use the dollars set aside to recruit a replacement and cover potential losses.
Benefits to seller
- Business can potentially sell for a higher price as the investor knows they are protected if something were to happen to key persons.
- Key persons may be in a position to receive gains if they remain with the firm for the service period stated.
Life insurance and golden handcuff
Protect your investment
Your investment in the company is, in large part, dependent on the key people who are instrumental to the continued success of the business. If one of those key people were to die or become disabled, the investment could be lost, but definitely would be negatively impacted.
Life insurance
Key person life insurance will provide tax-free payments to the company to help recoup some of the costs and potential lost revenue. To give you an idea of the cost for $25 million of protection we’ve provided some estimated ranges below:
| 20 Year Term | $5 Million | $7.5 Million | $10 Million | |||
| Preferred | Standard | Preferred | Standard | Preferred | Standard | |
| Age 40 | $3,490.95 | $5,692.45 | $5,198.83 | $8,501.18 | $6,906.90 | $11,309.90 |
| Age 50 | $9,077.95 | $14,665.45 | $13,579.43 | $21,960.68 | $18,080.90 | $29,255.90 |
| Age 60 | $26,144.95 | $42,262.30 | $39,179.93 | $63,355.95 | $52,214.90 | $84,449.60 |
Data Breach Anchor
Retain and reward
The most likely reason a key person might leave is to join another firm. Many firms are entering this industry or expanding their footprint and are looking for quality people to lead their efforts.
Golden handcuff
Golden Handcuff plans are designed to create loyalty and keep these key people. By promising a significant future benefit (Golden) that is contingent on completing a service period (Handcuff), businesses are able to tie the employee to the business. Incentives/rewards for achieving certain targets can be built into these plans.
There are many plan types and designs available. Below are some estimated cost ranges for a popular design.
| Current (non guaranteed) based on premium allocation and interest rate tables | |||||||||
| Year | Employer net after-tax outlay | Employer net surrender value | Employer net accumulated value | Employer net loss benefits | Employee tax on bonus | Economic benefit cost | Employee net after-tax outlay | Employee net surrender value | Employee net loss benefit |
| 1 | $50,000 | $23,619 | $43,091 | $50,000 | $0 | $474 | $142 | $0 | $717,760 |
| 2 | $50,000 | $69,615 | $88,639 | $50,000 | $0 | $534 | $160 | $0 | $763,308 |
| 3 | $50,000 | $118,206 | $136,782 | $50,000 | $0 | $600 | $180 | $0 | $811,451 |
| 4 | $50,000 | $169,542 | $187,670 | $50,000 | $0 | $681 | $204 | $0 | $862,339 |
| 5 | $50,000 | $223,779 | $241,459 | $50,000 | $0 | $760 | $228 | $0 | $916,128 |
| 6 | $50,000 | $281,529 | $298,314 | $50,000 | $0 | $856 | $257 | $0 | $972,983 |
| 7 | $50,000 | $344,137 | $358,409 | $50,000 | $0 | $961 | $288 | $0 | $1,033,078 |
| 8 | $50,000 | $411,241 | $421,931 | $50,000 | $0 | $1,086 | $326 | $0 | $1,096,600 |
| 9 | $50,000 | $482,121 | $489,073 | $50,000 | $0 | $1,222 | $367 | $0 | $1,163,742 |
| 10 | $50,000 | $556,712 | $560,042 | $50,000 | $0 | $1,408 | $422 | $0 | $1,234,711 |
Business interruption Anchor
