Monday, July 22, 2013

Executive Bonus Plans: Rewarding Employee Performance

Executive Bonus Plans: Rewarding Employee Performance

Rewarding employee performance strengthens the stability of a business and reduces employee turnover among the ranks of valuable employees.  Losing an important employee to a competitor can disrupt current and future business profitability.

Privately-held businesses entities have limited options when designing compensation packages for their employees.  Many small companies are unwilling to establish qualified retirement plans because of the high cost of the plans and because they have to include all eligible employees.

Nonqualified deferred compensation plans are an option but participation is restricted to certain highly paid management employees.  Having benefits in addition to normal compensation is a proven method for improving employee morale and job satisfaction and thereby reducing costly employee turnover.

An Executive Bonus Plan (also known as a Section 162 plan after the section of the Internal Revenue Code that permits an employee to deduct compensation paid to employees) offers the opportunity to reward any employee.  It could be a one-off bonus for exceptional work in any year or, more commonly, an on-going arrangement to provide additional compensation annually.  To enhance the future value to the employee and the employee’s family, the payment is usually paid as the premium for a cash value life insurance or annuity contract owned by the employee.

Attaching conditions, such as job performance or continued employment, to the right to continue receiving this additional compensation increases the attractiveness of such a plan to the employer and further increases the likelihood that the employee will remain with the company. 

The employee is responsible for payment of income tax on the bonus paid by the employer.  In some cases, the employer will pay an additional amount to cover the associated income tax liability in which case the plan is known as a “double bonus” plan.

As long as the bonus represents “reasonable compensation”, the business can deduct the bonus used to pay the life insurance policy premium.  The employee owns the life insurance policy and names his or her beneficiary.

An employer can place certain restrictions on the policy as an incentive to the insured employee to remain with the company.  One such restriction can be limiting access to policy cash values by the employee for a selected period of time, such as the employee’s expected date of retirement.

Additional Considerations
Employers should seek legal counsel regarding creating a formal agreement between the employer and the employee governing the Executive Bonus Plan.  Any corporate records notation or agreement should spell out who will participate in the executive bonus program, why such employee or employees were selected for participation, and the nature of the benefit these employees will receive.  Any restrictions on an employee’s rights to access insurance policy cash value, or any “golden handcuffs” arrangement, should be spelled out in the written agreement between employer and employee.

Actual restrictions on the policy itself, such as limiting the employee’s access to cash values, can be enforced using a policy endorsement filed with the insurance company. The endorsement should indicate the time period during which policy restrictions will remain in effect, and list the conditions for removal of any restrictions on the employee’s access to the policy.

The purposes of a permanent cash value life insurance Executive Bonus Plan include growing funds on a tax-deferred basis to be made fully available to the employee for supplemental income in retirement.

From an employee’s perspective there are two concerns with this type of arrangement.  If this is not a “double bonus” plan, the employee may be concerned about having the funds to pay the income tax liability.  Also the employee may be concerned about the viability of the life insurance contract if the employer does not pay the bonus each year.  To address some of these concerns, the employer and the employee could agree to establish the plan for a limited period and make payments in an amount sufficient to sustain the policy after the payment period.

With a properly structured executive bonus plan, both the employer and the employee win.  The employer benefits from greater employee loyalty and lower staff turnover; the employee benefits from expanded compensation options.

Article written by Columbus Life appeared in Columbus Life Advanced Market Insights October 2011 edition.

Tom Newsad has been building relationships for over twenty years in his community.  Newsad Insurance Services offers life insurance, fixed index annuities, health insurance, and disability and long term care insurance.  For more info see . Tom serves clients in the Butler, Hamilton, Montgomery, Warren, Miami, and Preble county areas and beyond.

Wednesday, July 17, 2013

Indexed Annuity Magic: How Do They Do It?

One of the greatest mysteries in the indexed annuity market is how insurance companies are able to offer market-linked gains on an annuity with a principal protection feature.  Many are familiar with the strong guarantees that fixed annuities offer, but it comes at the cost of low potential for gains.  On the other hand, variable annuities provide unlimited potential for gains, but you must be willing to stomach unlimited risk to achieve it.

The indexed annuity is a unique gem amidst a pebble-lined beach—but how is this awesome feat accomplished?  How can insurance companies offer purchasers market-linked interest without the risks associated with VAs and still afford to offer a guarantee?  It is actually pretty amazing and extraordinarily simple to accomplish.

For comparison, let’s explore what the insurer does with the purchaser’s money when offering fixed annuities.  When an annuity purchaser makes a premium payment into a fixed annuity, the insurance company turns around and uses that premium to purchase bonds.  Generally, the bonds are high quality and they mature at the same time the surrender charges expire on the purchaser’s annuity (i.e. I buy a 10 year surrender charge annuity and the insurance company then purchases 10 year Grade “A” bonds to cover my annuity’s guarantees).  This provides a relatively safe investment vehicle for the insurer to make enough interest off of in order to earn their spread/profit.

So, just for simplicity’s sake, let’s make the assumption that the bonds are paying 4% interest and the insurance company is crediting 3% interest on its fixed annuities.  This means that the difference of 1% is what the insurance company is using to cover its expenses and anything that is left of its spread/profit.  Makes sense, right?

OK, let’s move over and apply this to fixed annuities: instead of putting 100% of the purchaser’s premium payment in bonds, with an indexed annuity, the insurance company puts about 97% of the premium payment in bonds.  (Some companies might use 96%, 98%, etc. of the premium payment; you get the idea!)  The bond covers the indexed annuity’s annual 0% floor, which protects the annuity purchaser from market losses.  It also covers the minimum guaranteed surrender value, providing a return of premium plus interest to the beneficiaries in the event of death, in addition to providing the same benefit to the purchaser if the indexed crediting does not perform.

Now, let’s get to the other 3% of the purchaser’s premium payment, where the real magic happens: this portion of the purchaser’s premium payment is used to purchase options.  It is the options that provide the index-linked interest on indexed annuity contracts. Today, we might take that three cents of our one dollar to the options-seller and ask that he sell us an option for the S&P 500, using an annual point-to-point crediting method with a cap being used to limit the exceeded interest.  The option-seller might tell us that our three cents will buy our customers a cap of 3.85%, which isn’t so hot.  Then again, the S&P 500 is relatively low right now.

However, if the market suddenly goes back up, and the S&P 500 returns to 1500 the next month, that option-seller will likely offer a much higher cap for our three cents.  (After all, if it is already at 1500, what is the likelihood that the S&P 500 will increase tremendously over a one-year period?)

So there you have it, folks.  No tarot cards, no voodoo dolls—just plain and simple math.  And even though the logic behind indexed annuities is rather simple, it is magical nonetheless.

Author: Sheryl Moore, President and CEO of and
Taken from Annuity from article posted 9/7/2011.

Tom Newsad has been building relationships for over 20 years in the financial services industry.  Newsad Insurance Services of Middletown, Ohio, offers life insurance, health insurance, fixed index annuities, long term care insurance, and disability income insurance and serves Hamilton, Butler, Warren, Montgomery, Clermont, and Miami Counties and beyond.  Visit for more information.

Tuesday, July 9, 2013

Term insurance policies that Newsad Insurance Services has sold in the past were also called Mortgage Insurance. They are also a life insurance policy. One of these policies is a decreasing term contract and many people that bought these policies had the need to cover their mortgages in a 15 year or 30 year joint decreasing term. The disadvantage to these policies is that the premiums remain level and the total death benefit decreases in value. A review by your Life Insurance Adviser is the perfect time to re-evaluate your needs for this product and protection.

Tom Newsad offers Life Insurance and Financial products in Butler, Warre, Montgomery, and Preble County areas in Southwest Ohio. Contact me at