B—Survivor Income

The sudden loss of income at the death of a breadwinner can be devastating to a surviving family. A survivor income plan can assure that continuing income will be available and is based upon a written agreement between the employer and the employee. Benefits under such a plan usually take the form of ongoing and periodic payments for a specified number of years following the employee’s death. Typically, such benefits are set as a percentage of final pay for a period of years. For example, the plan may provide for 50 percent of final pay, per year, for 10 years.

DURING LIFETIME, the employer and employee enter into an agreement providing for the employer to make periodic payments to the employee’s beneficiary following the employee’s death. In order to provide the funds to meet its obligation, the employer purchases a life insurance contract insuring the employee. (Note that employer-owned life insurance must meet strict notice and consent requirements if the death benefits are to be received free of income taxes). Neither the employee nor his family has any rights whatsoever in this policy. Because the employer is both owner and beneficiary of this contract, the premium payments are not tax-deductible to the employer. Nor will the premiums be taxable to the employee provided the policy is clearly not tied to the promise to pay the survivor benefit. In this sense, the policy is carried in the same manner as key person insurance, the difference being the purpose for which the death benefit will be used.

UPON DEATH, the insurance company pays a death benefit directly to the employer, as beneficiary of the policy insuring the employee . (Note that under some circumstances the corporate alternative minimum tax could result in the indirect taxation of life insurance proceeds received by a corporation.) Under the pre-existing agreement, the employer then provides a survivor income benefit to the family. While these payments are fully tax-deductible by the employer, they will be received as taxable income by the family.