Matthew Erker – Advisor
Executives face a host of challenges which can differ dramatically depending on their industry, company size, and other variables. But many executives often share at least one challenge: information overload—which can make seemingly straightforward tasks, like managing personal benefits, daunting. Plugging any of the relevant terms into a search engine doesn’t help much, either—it yields a wealth of results, all requiring their own research and sifting for reliability and accuracy.
Though the shapes and sizes of executive compensation packages will inevitably vary, there are some universal questions worth asking, particularly when it comes to deferred compensation plans, disability insurance, and life insurance. Understanding the intricacies of your options, however nuanced, can help you align your benefits package to your personal and financial goals.
Many executive packages offer deferred compensation options—an umbrella term which can apply, depending on the structure, to several plans, including some life insurance plans. Among the common options considered deferred compensation are supplemental executive retirement plans (SERPs), top-hat plans, and bonus deferral plans. SERPs offer select executives tax-deferred savings over and above the maximum allowed contributions to a 401(k), IRA, or other qualified plan.
The nuances here are myriad and the implications important to understand. Some initial questions to dig into: Is the plan qualified or non-qualified? When are the benefits taxable—today, or upon payout? And when are they paid out? How will they be paid out? Can you choose how to receive your payout? Learning the answers to these questions will put you well down the path to making informed decisions about your current and future financial pictures.
Life insurance falls into two primary buckets: term life or permanent life, which itself consists of two main flavors—whole life and universal life. Term life policies apply to a set time period—say 10 or 20 years—which can be renewed at the period’s conclusion, if desired.
Permanent life policies, on the other hand, cover the insured for the rest of their life and accumulate cash value over time. Whole life insurance policies have fixed, consistent premium payments, part of which goes into a high-interest bank or investment account, thereby generating a guaranteed cash benefit in addition to the death benefit. Universal life insurance policies are more flexible—in terms of premium payment amounts and timing, as well as the death benefit amount.
At the risk of oversimplifying, here are some entry level considerations when it comes to life insurance options for executives: Are you over- or underinsured? This depends heavily on your current financial picture and your future financial goals—for example, whether you still have college tuition in your future, or whether your children have already graduated. Who is the policy owner—you or your employer? Who is the beneficiary? Often, you may choose your beneficiary, but depending on the circumstances, your employer may be the beneficiary. Is there a cash value? If so, how is it invested, and can you access it? Are the premiums and benefits taxable?
Finally, disability insurance is arguably the simplest of these considerations, as the options are relatively straightforward. There are two types—short term and long term—which are intended to replace a portion of your paycheck while you are unable to work. Short-term disability insurance typically covers work absences lasting from three to six months, while long-term disability insurance could cover an absence of years, depending on the policy terms. Which leads to one of the major factors to consider when researching disability insurance options: Might you need additional disability insurance? Will the benefits fully cover your anticipated expenses and liabilities? If not, it might be worth considering paying for additional coverage. It’s also important to review how the policy defines disability, which will naturally impact the circumstances under which you are able to file a claim and capitalize on your benefit.
There can be as many variations of executive compensation packages as there are job titles. Critically, one size does not fit all. Executives’ lives differ dramatically, so taking a uniform approach to thinking about and selecting among the options is ill-advised. Fortunately, a trusted, experienced financial advisor can be a tremendous help in this area. For example, by researching the options in concert with your tax advisor, attorney, and/or other professionals where appropriate, your advisor should be able to help ensure that you are fully capitalizing on the right benefits for you, your family, and your future.
© 2022 Moneta Group Investment Advisors, LLC. All rights reserved. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information and opinions contained herein are subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.
