What are the Pros and Cons of Deferred Compensation Plans?
Life insurance offers financial protection for billions of people all over the world. Life insurance policies are not only purchased by individuals, but they are also purchased by numerous companies and institutions, as they use these policies for multiple purposes, such as, to offer liquidity. Nevertheless, the rules relevant to corporate ownership of life policies are a lot more complicated than the ones for individuals.
Life insurance policies provided by companies to their employees normally have deferred compensation, which is an agreement between an employee and an employer that states a portion of their income or reimbursement for work performances is deferred or held back for payment in the future. There are some definite deferred compensation plans pros cons.
Used Widely as a Retirement Savings Plan
Deferred compensation is used widely as retirement savings plans by various companies. The companies might provide a retirement plan for their employees as part of their compensation packages. The package might include actual wages and health insurance, for example. While the value of the retirement package is not stated in the yearly or even hourly rate of the particular pay, it is actually a deferred compensation that will be provided to the employees based on an agreement focusing on time and rate.
A large number of employers take part in these deferred compensation programs that allow their employees to only obtain some portion of their hourly or yearly income that their employers invested, instead of receiving it as a financial reimbursement for work they did. Below you will learn several of the deferred compensation plans pros cons.
Pros of Deferred Compensation Plans
• Companies that make use of life insurance to invest in deferred compensation plans do not get taxed on the income, because the accretion of the cash value does not subject to tax until it is distributed.
• Employees or workers who are covered under this type of compensation plan will only owe any taxes on the plan’s advantages after they have received the first distributions.
• This particular type of compensation plan offers excellent flexibility compared to other plans. Companies have the freedom to specify names of people who will be covered, select the levels and terms of coverage, indicate the forfeiture alternatives, and any restrictions.
Cons of Deferred Compensation Plans
• The company’s income tax deduction is postponed until the year where the income is taxable to the compensated employee.
• The plan assets are accessible to the creditors when bankruptcy occurs.
• In order to take advantage or make use of the deferred compensation plans, the employers have to meet certain requirements.
• Governmental or non-profit organizations are subject to limiting rules of using the deferred compensation programs.
If you are interested in this type of compensation plan, it is advisable that you talk to BeamaLife senior advisor that will reveal all the necessary information concerning the plan. You need to learn more about the deferred compensation plans pros cons before you sign up, because you need to ensure that it is the right policy for you.
Additionally, ensure that you read the terms and conditions properly before you sign any final policy documents. It is imperative that you do not rush your decision, because buying an insurance policy, especially one such as a deferred compensation plan is a serious matter. Always make sure that you fully understand everything that the insurance policy offers you as well.