Employee loyalty is not what it used to be. One in four employees will leave their jobs, according to the 2018 Work Institute Report. And that same report states that nearly 77% of that turnover could be prevented by employers. Losing a key employee can create a gap in knowledge, causing a company to scramble looking for answers. Without strong retention, the loss of a key employee can be quite expensive and may leave your business in a position of instability.
This uncertainty makes retention of employees a top priority. In today’s labor market, with employees moving from job to job more frequently, it’s critical that a business find ways to reward and attract top talent. The 2018 Gallup report: How Millennials Want to Work and Live, estimates that millennial employee turnover costs the U.S. economy $30.5 billion annually!
If the status of your business or its reputation in the industry doesn’t make it a destination for talent, what can be done to attract and retain employees? How do you separate yourself in the sea of sameness? Highly talented employees are going to have options. To combat this, there are several things that can be done to retain and attract these highly talented, key employees. To help increase the odds of retaining and attracting talent, consider one of the following options to improve your value proposition:
Executive Bonus Plan
Rather than giving a cash bonus to a key executive, consider giving them a bonus in the form of a premium payment towards a permanent life insurance policy. The premium will be treated as a tax-deductible expense to the business and will require the employee to report the premium as earned income. The policy will be owned by your employee, providing them with death benefit protection for the employee’s family, living benefits in the event of a qualifying illness1 and the potential to access the cash value for supplemental income (potentially) through tax-free loans and withdrawals.2
Split Dollar Arrangements
Split dollar arrangements are a way for a business to help key employees of the business acquire permanent life protection. The business helps by funding a life insurance policy on the life of their key employee but unlike an executive bonus, this type of plan allows the business to recover the cost of their premium payments later. There are two types of Split Dollar arrangements, Loan Regime and Endorsement (Economic Benefit). Depending on the business owner’s goal, one Split Dollar arrangement may be more appropriate than the other, but both types can function as a golden handcuff by rewarding your key employee today and incentivizing them to stay long term.
Salary Continuation
A salary continuation plan is designed by companies to provide additional supplemental retirement income to select, key executives. The employer is responsible for funding the plan that will ultimately pay a future benefit to the key employee chosen. If the executive participating in the plan dies prematurely, the executive’s beneficiary would receive the benefit. This type of plan is often funded with permanent life insurance with the owner and beneficiary being the business. If properly funded, this may allow them to leverage the cash value in the policy to help pay the future benefit to their key executive.
Key Person
Key Person Insurance is life insurance purchased by a business on an owner or an employee whose services contribute substantially to the success and continuity of the business. The business purchases a life insurance policy insuring the life of the key person using after-tax dollars. The insurance policy is owned and payable to the business. In most cases, when an owner or key employee dies this will lead to a disruption of the business and potentially will lead to financial instability or even loss. The life insurance on the key employee provides the business with access to cash at a time when they need it the most.
Not all plans are a fit for all businesses. Depending on the circumstances of your business and its goals, one of these plans may or may not be appropriate. To help better understand the nuances of each plan and where they fit, you should work with your trusted advisor and/or CPA to help you find the most appropriate option.
1 Living benefits are provided by no-additional premium accelerated benefit riders. Payment of Accelerated Benefits will reduce the Cash Value and Death Benefit otherwise payable under the policy. Receipt of Accelerated Benefits may be a taxable event, may affect your eligibility for public assistance programs, and may reduce or eliminate other policy and rider benefits. Please consult your personal tax advisor to determine the tax status of any benefits paid under this rider and with social service agencies concerning how receipt of such a payment will affect you. Riders are supplemental benefits that can be added to a life insurance policy and are not suitable unless you also have a need for life insurance. Riders are optional, may require additional premium and may not be available in all states or on all products. This is not a solicitation of any specific insurance policy.
2 The use of cash value life insurance to provide a tax-free source of income assumes that there is first a need for the death benefit protection. The ability of a life insurance contract to accumulate sufficient cash value to help meet accumulation goals will be dependent upon the amount of extra premium paid into the policy, and the performance of the policy, and is not guaranteed. Policy loans and withdrawals reduce the policy’s cash value and death benefit and may result in a taxable event. Withdrawals up to the basis paid into the contract and loans thereafter will not create an immediate taxable event, but substantial tax ramifications could result upon contract lapse or surrender. Surrender charges may reduce the policy’s cash value in early years.
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