Group Carve-Out Advantages
As we have already noted, group carve out plans offer advantages to the executives that are included. They also offer employer advantages.
The principal employer advantages of a group carve-out plan include:
Discrimination concerns are reduced
Benefits are conferred without an increase in cost
Participation in the plan may be limited by the employer, and
Employer continues to receive a current tax deduction
Reduction in Group Term Discrimination Concerns
To qualify for group term life insurance's employee tax exclusion, group term life insurance must meet four conditions relating to the:
Nature of the death benefit
Group for whom it is provided
Employer's participation, and
Method of determining insurance amounts
If a group term life insurance plan fails to meet these conditions, the participants' ability to exclude the value of the first $50,000 of term life insurance from current income will be lost. One of the conditions that may cause employer concern is the requirement that life insurance amounts not be discriminatory. Since senior executives may have larger life insurance needs than other employees -- if only to continue larger incomes for family survivors -- the general inability to provide them with larger group life insurance benefits is confining.
By eliminating group term life insurance coverage in excess of $50,000 for the executives chosen to participate, the group carve-out plan causes much of the discrimination issue to disappear.
No Cost Increase
Typically, there is no cost increase to provide the same amount of life insurance coverage as under the group plan through a combination of group term life insurance and universal life insurance. Of course, if the death benefits are increased or supplemental voluntary contributions are made, those changes would change the premiums. As we noted earlier, the minimum premium for the universal life insurance coverage is about the same as the cost for an identical amount of group life insurance.
In practice, a group carve-out plan may reduce the employer's overall employee benefit costs. Senior executives -- the ones usually included in group carve-out cases -- usually have the highest level of group term life insurance and are also the oldest covered employees. Because of that, an employer will typically reduce its overall group term life insurance rates by removing them for group term life insurance amounts in excess of $50,000.
Ability to Limit Participation
Although group term life insurance must not discriminate, such is not the case with respect to the carve-out amounts. As a result, the employer may provide much larger total life insurance benefits to chosen executives. There is no concern about any group plan discrimination since the group term life insurance coverage provides a base coverage amount of $50,000 on all executives.
Current Employer Tax Deduction
The premiums that the employer pays for the group term life insurance and the employee-owned universal life insurance policy are tax-deductible, although not for the same reason. The premium for group term life insurance can be deducted as an employee benefit; the premium for the universal life insurance premium is deductible as compensation. Since the universal life insurance premium is compensation to the insured executive, it is included in his or her taxable income. However, even if the group carve-out plan were not implemented, the executive would have taxable income anyway because of the Table I costs.