The Self-Owned Option
By Randy Kemnitz, MS, CFP, CLUMr. Kemnitz is Director of Business Planning and Executive Benefits for ING U.S. Insurance Life Sales Support. For more information on ING executive benefits, contact 866-464-7355, option 1.
Benefit plans specially designed by employers for key employees and executives are often times intended to help recruit, retain and reward. These plans provide financial benefits, specifically wealth accumulation and death benefit protection. Basic benefit and retirement plans have restrictions, such as contribution limits for 401ks or low face amounts in group life insurance plans, whereas executive benefit plans cater to rising stars and C-suite employees.
A potentially simple, effective executive benefits option, Self Owned Life and Retirement (S.O.L.A.R.) insurance arrangements, may provide advantages to both businesses and key employees. To better understand this emerging trend I’d like to offer five tips to a successful executive benefits sale.
Tip #1: Avoid the temptation to sell a solution before you’ve diagnosed the problem
The first question I ask when an agent raises an executive benefits plan design question keys in on what the employer is hoping to accomplish. It is essential to understand the motivation behind the plan before a solution is recommended. Just as doctors must diagnose before prescribing, your diagnosis helps establish a consultative sales approach and positions you to find the right solution.
A consultative approach accounts for the ‘how and why’ and the back story. Take time beforehand to research the company, check out the corporate website and find out about competitors and the industry. If you walk into the first meeting with the basic information already in your back pocket, you can use your face-to-face time to gain insight and diagnose the problem, so you can offer the right solution. Ask questions and only provide specific solutions when you are sure you understand their needs.
I was leading a discussion of executive benefits earlier this year and an agent asked if I had any tips on closing a difficult sale. I asked him what the employer was trying to accomplish and he couldn’t answer it. I suggested he go back and diagnose the situation before attempting to close the sale.
There isn’t any single approach that will compel a client to say ‘yes’ to an executive benefit plan. The keys are to:
- Discover: Who are they?
- Diagnose: What do they need and want?
- Design: What do you recommend?
- Deliver: What are you going to do about it?
Tip #2: Income tax management is an important ingredient
When 401ks were introduced 30-plus years ago, the drumbeat was about the beauty of tax deferral. The theory was: Defer paying taxes until employees are in a lower tax bracket in retirement.
Very few of us today think that income tax brackets will be lower in the future. And there is growing evidence that our spending, especially for executives, will not be much lower in retirement. Industry research suggests that retirement income replacement ratios grow as current income grows. Simply put, the more you earn today, the more you may likely need in retirement.
Given this principle, tax free income can be highly appealing for executives. S.O.L.A.R. insurance arrangements may provide important tax advantages to both businesses and key employees, including immediate tax deduction to the employer in many cases if the compensation is considered reasonable. However, the premium payment made by the employer will be taxable income to the employee. These arrangements may provide tax deferred growth, tax free income and death benefits.
Employers should also consider, however, that the self owned life insurance structure comes with certain limitations. The employer has no control over the asset used to fund this type of benefit arrangement and cannot use the life insurance to provide any recovery for the cost of providing the benefit.
Tip #3: Understand the decision-making process and key players, inviting other advisors to the table
There will be times of decision-making stress in the sale. This may lead to a ‘paralysis of analysis.’ Often employers do not have a standard method by which to evaluate these plans. Therefore, they move beyond their normal decision-making process, or ‘off the grid’ for these types of plans. They have bought routine supplies or services before and know how to evaluate that type of purchase.
An executive benefit is usually far from routine. Therefore, it is important to understand how decisions are made at the organization and who will be involved in that process. Ask early in the diagnosis about the employer’s process for decision making. This may provide you with insight as to the best approach and save you headaches down the road.
In addition to your client and its employees, there may be other decision making stakeholders and advisors, such as CPAs or attorneys. These other advisors are typically ‘gatekeepers’ for your clients and may have an important role to play in designing and implementing benefits. Sometimes these advisors are the last hurdle between selling a plan design and getting the client to put the plan in place. By making room for these advisors in the planning process, you can convert your clients other advisors into your biggest allies. Not only will they help you get the case implemented, they may even refer new clients to you in the future.
Tip #4: Make sure everyone understands the plan
What is the plan to communicate and enroll employees? This often-overlooked step is extremely important to the long term success of the plan. In a 2009 article on how to develop an effective benefits communication strategy, the Society for Human Resource Management (SHRM) recommends a comprehensive benefits communication plan that considers the demographics and life stages of the participants as well as the company and employee culture.
When I introduce executive benefit plans, it is not unusual for the employer to host a dinner including the spouses of key employees. Companies with a culture of ‘family’ may find it beneficial to include the key employees’ family. Another important suggestion made by the SHRM is to make the communications plan a year-round endeavor, not just a one-time event.
Having a communications plan for enrollment and offering ongoing support ensures participation and helps everyone appreciate the benefits. A plan that is not understood ends up being ineffective. Put in the time to make sure the plan is understood and valued by key employees to ensure they attain their wealth accumulation and protection needs.
Tip #5: Commit to ongoing policy support
Installing the executive benefits program is just the beginning. Ongoing support helps to make sure the program is running like a well-oiled machine. It’s important to work with a provider who offers ongoing support that is personalized, knowledgeable, and customer-centric.
One of the key advantages of a S.O.L.A.R. insurance arrangement is the availability of potential supplemental retirement income through the use of policy loans. However the use of loans carries a financial risk; if the policy were to lapse outstanding policy loans most likely will become taxable income, a risk we all would prefer to avoid.
Programs that offer ongoing support help ensure that key employees take advantage of all the benefits that a S.O.L.A.R. insurance arrangement offers, while also helping to prevent any unintended outcomes. Ongoing support may be especially valuable as employees begin planning their retirement income distributions or manage policy loans. It’s also helpful for doing customized retirement income analysis, automating the distribution process and monitoring those distributions annually.
In Conclusion, these five tips provide a roadmap for a successful sale and introduction of an executive benefit program. Listen to the needs of employers, involve all decision-makers in the process, communicate the benefits to maximize participation and enrollment, and provide ongoing support. These steps position you for success in your next executive benefits sale.