Tag Archives: retirement income

The Future of Life Insurance

In its most recent report, “Tomorrow’s World; the Future of Aging in the U.K.,” the International Longevity Centre, a think tank focused on longevity, population and aging, painted a gloomy picture. The report says:

  • That the social care system is crumbling, and social class will heavily affect the life experience of the aged.
  • That housing and planning are inadequate to meet the needs of an aging population.
  • That individuals are underestimating their life expectancy and are likely to run out of money in old age.
  • That older people will suffer (and perhaps die) of different things: Where once the issue was heart and respiratory diseases, now it is likely to be illnesses of non-communication such as dementia.

It’s a worrying vision – one that perhaps is replicated in many other countries. The report recommends a bold 10-point action plan. It says:

1. Health must find a way to be more responsive and preventative.
2. Government must make progress in delivering a long-term settlement to pay for social care.
3. Savings levels for working age adults must increase.
4. The average age of exit from the workforce should rise.
5. The number and type of homes built should be increasingly appropriate for our aging society.
6. Government should make progress in facilitating greater risk sharing in accumulation of retirement income.
7. There is a need for a more informed older consumer.
8. Our aspirations for retirement must be about much more than us spending more hours watching television.
9. Businesses should better respond to aging.
10. The social contract needs to be strengthened between young and old.

Doesn’t the life and pension insurance industry have a part to play in almost all of this road map? Is there any reason why the industry should sit on the sidelines?

Here are five issues for the industry:

  • Insurers need to continue the shift from being reactive to being proactive – and must share the benefits with policyholders. Stakeholder buy-in through effective communication and enlightenment is critical – and it is increasingly becoming urgent.
  • Can insurers – on behalf of their policyholders, who are inevitably with them often for decades – influence issues related to home building and planning? I wonder how I would react if I really thought that my life and pension insurer was representing my interest to a point that it was lobbying about this type of stuff on my behalf?
  • The need for cooperation between the private and public sectors reinforces the need for empathy by both government and private insurers toward each other, perhaps with tacit agreement that they (we) are all in this together.
  • As the average age of workers increases, and some seek an alternative to watching TV or just trying to make ends meet, I wonder whether there is propensity for more workplace accidents. Isn’t there an employers liability/workers’ compensation angle to consider?
  • And, of course, how do we make life and pension insurance attractive to those starting their work life? Doesn’t the industry really need to make insurance both more relevant and fashionable?

Don’t insurers need to communicate better, engage differently, think more about the changing demographic footprint and generally step up the pace? All the innovation seems to be going into P & C insurance, but we can’t allow that to suck the energy from life and pension.

After all, having a “connected bedpan” as part of the Internet of Things might be useful for some – but don’t we need to be bolder than that in our thinking?

How to Keep Key Employees

If you’ve ever lost a key employee to a competitor, you know first-hand how deep the pain is. Not only does the departure of a key employee hurt your bottom line, but you must spend valuable time finding and training a suitable replacement.  If the executive was a possible successor to run your business in the future, you may have to consider other, less appealing options.

Key employees drive revenue and are important to perpetuating the business.  But, in today’s economy, key employees are less loyal and might be tempted to leave for even slightly greener pastures.

One way your company can attract and retain top people is to reward them with additional compensation through a supplemental executive retirement plan (SERP).

Highly compensated employees are typically not able to put away enough for retirement through the company’s 401(k) and profit sharing plans. With a SERP, your company agrees to provide a benefit to an executive based upon satisfaction of terms and conditions that the company sets forth, such as sales goals, performance and longevity.  You choose who participates, the level of benefits, the types of benefits, and the plan provisions.  Benefits typically include retirement income, survivor benefits, and disability payments, and are subject to your company’s creditors.

Most businesses earmark assets and current cash flow to pay future SERP liabilities because the “pay when due” approach may put too much financial pressure on the business.  Most organizations choose to informally fund SERPs with taxable investments, such as equities, or with tax-favored Corporate-Owned Life Insurance (COLI).  Both offer attractive, growth-oriented investment opportunities. 

Assuming the executive can medically qualify for the coverage, COLI can provide additional tax advantages: tax-free gains on investment earnings in the policy, tax-free access to cash values through policy withdrawals and loans, and an income tax-free death benefit at the passing of the executive. 

The coverage can be even designed to allow your company to eventually recover all or a portion of the SERP costs, including benefit payments and policy premiums. A SERP could be established with a COLI policy on the executive’s life that is sufficient to provide the future benefits outlined in the agreement.  The business would own the policy, pay the premiums, and serve as beneficiary. 

At retirement, the executive would receive supplemental income benefit based upon the terms of the SERP agreement.  The company would access policy cash values to provide the agreed-to benefit to the executive.  The retirement benefit would be taxable to the executive and deductible to your company. 

When the executive eventually passes away, the company receives the tax-free death benefit proceeds as a mechanism for cost recovery.

If the executive dies before retirement, the death benefits are paid income tax-free to the company.  The business can then provide the benefits promised to the executive’s beneficiaries and use the excess funds to recover the cost of the plan and protect the business from the loss of the executive.

A properly designed SERP can be a valuable tool.