As a business owner, you may be contacted to complete an insurance premium audit. Learn what the insurance audit process entails and how to prepare.
Use incentive plans to help reward employees
Small business owners, like you, can give back to your employees with incentive plans.
Explore incentives for employees
Employee benefit programs are available through State Farm Life Insurance Company® (not licensed in MA, NY or WI) or State Farm Life and Accident Assurance Company (licensed in NY and WI). These include:
The Split Dollar Plan
There are two ways this incentive plan can work:
- You and your employees share the premium payments
- You pay the entire premium to buy insurance on the employee's life
Whether the employee lives or dies, you may get back your portion of the premium
payments. Plus, the plan is
flexible. The premium can be set at a fixed rate and paid by the employee, the employer, or both.
Why this plan may be good for you
The plan may:
- Offer an incentive for the employee to stay with your organization
- Provide a way to be selective in rewarding certain key employees
- Access cash value from the policy for quick funds when you own it
Why this plan may be good for your employees
For your employee, the plan may:
- Offer permanent insurance at term rates
- Help protect against losing life insurance coverage later
The Executive Bonus Plan
This plan provides a way for you to help a key employee meet their personal life
insurance needs.
You’ll pay the premium on a life insurance policy owned by the key employee. The premium payment is
treated like a bonus – as extra taxable compensation for the employee and tax deductible for the business.
You can also pay a tax-deductible bonus to help cover your employee’s extra tax burden. Together, this
“premium bonus” and “tax bonus” can minimize—or even eliminate—the employee’s personal cost for their life
insurance.
Why this plan may be good for you
The plan may:
- Help retain key employees
- Allow you to be selective in rewarding key employees
Why this plan may be good for your employees
For your employees, the plan may:
- Provide necessary personal life insurance
- Offer a hedge against future insurability
Deferred Compensation Plan
Under this contract, a key employee — usually someone in a high tax bracket — gets guaranteed fixed payments starting at retirement instead of salary raises or bonuses.
Why this plan may be good for you
For you, it may:
- Help retain a key employee
- Attract a top employee
- Be used exclusively for select employees
Why this plan may be good for your employees
For the employee, it may:
- Allow the employee to remain in a lower income tax bracket
- Provide money at retirement and for the family in the event of death
How it works
In the deferred compensation contract, prepared by a lawyer, you may agree to:
- Pay the employee a specified salary at retirement for a set number of years
- Provide continuous payments to the employee's beneficiary if the retired employee dies before receiving the full number of payments
- Offer a death benefit to the employee's beneficiary if death happens before retirement
Usually, the employee agrees to:
- Remain with the employer until retirement
- Refrain from competing with the employer after retirement
State Farm Cash Value Life Insurance can fund a deferred compensation plan, cover
retirement payments or
provide a death benefit to the employee’s beneficiary.
Coverage in action
As a business owner, you’ve invested time and resources in developing your key employee. With key employee incentive
plans, you can provide benefits that may keep this person loyal to you and your operation.
Types of incentives
Incentives can fall into three category types.
Financial incentives
- Bonuses
- Profit-sharing
- Stock options
- Salary increases
Non-financial incentives
- Professional growth
- Time off
- Recognition
- Perks and benefits.
Long-term and retention-focused incentives
- Equity participation
- KEIPs
Frequently asked questions about key employee incentives
Ten examples of key employees across different roles and industries:
- Chief Technology Officer (CTO): Oversees technology strategy and innovation in a tech company.
- Chief Financial Officer (CFO): Manages the company's finances, budgeting, and financial planning.
- Sales Director: Leads the sales team, drives revenue growth, and manages key client relationships.
- Head of Research and Development (R&D): Directs product development and innovation in manufacturing or pharmaceutical companies.
- Lead Software Engineer: Plays a critical role in software design and development, often responsible for key projects.
- Marketing Director: Shapes brand strategy, marketing campaigns, and customer engagement.
- Operations Manager: Ensures efficient daily operations and supply chain management.
- Creative Director: Guides the creative vision in advertising, media, or design firms.
- Senior Project Manager: Oversees major projects, ensuring they meet deadlines and budgets.
- Chief Compliance Officer: Ensures the company adheres to legal and regulatory requirements.
These employees are considered key because their skills, decisions, or
leadership have a significant impact on the
company’s success and sustainability.
This answer was drafted with the assistance of Artificial Intelligence.
A key employee is someone whose role, skills, and influence are essential to
the
organization's ongoing success and stability. Organizations often identify key employees for purposes such as
retention planning, succession planning, or special compensation arrangements. Several factors highlight their
critical importance to an organization's success, including:
Role and responsibilities: The employee holds a
position with significant
decision-making authority or oversight of critical functions such as strategy, finance, operations, or product
development.
Impact on business performance: Their work
directly influences the company’s revenue, growth, profitability, or competitive advantage.
Unique skills or expertise: They possess
specialized knowledge, skills, or experience that are rare or difficult to replace within the
organization.
Leadership and influence: They lead teams, manage
key relationships, or influence company culture and strategic direction.
Retention importance: Losing this employee would
result in substantial disruption, operational risk, or loss of
intellectual property.
Access to confidential information: They often
have access to sensitive company information, trade secrets, or proprietary data.
Succession difficulty: It would be challenging or
costly to find or train a replacement quickly.
This answer was drafted with the assistance of Artificial Intelligence.
Life insurance plans for key employees are special policies that a company purchases to
protect itself financially against the loss of an employee whose skills, knowledge, or leadership are critical to the
business. For example, if a company’s CTO dies unexpectedly, the company could use the key employee life
insurance payout to recruit and train a qualified replacement, cover lost business or revenue during the transition,
or
pay off debts or maintain creditworthiness.
What is key employee life insurance?
- Definition: A life insurance policy taken out by a business on the life of a key employee.
- Purpose: To provide the company with financial compensation if the key employee dies unexpectedly.
- Benefit: The death benefit can be used to cover losses such as finding and training a replacement, paying off debts, maintaining business continuity, or offsetting lost revenue.
Common features include:
Policy ownership: The company is the owner and beneficiary of the policy, not
the employee.
Insured person:
The key employee whose life is insured.
Death benefit:
A lump sum paid to the company upon the death of the insured employee.
Premium payment:
The company pays the premiums, and usually, premiums are not tax-deductible.
Policy types:
Can be term life (coverage for a specific period) or permanent life insurance (such as whole life or
universal life).
This answer was drafted with the assistance of Artificial Intelligence.
- Financial protection: Helps offset financial losses caused by the death of a key employee.
- Business continuity: Provides funds to stabilize the business during the transition period.
- Credit assurance: Helps reassure lenders or investors that the business can handle unexpected losses.
- Recruitment and retention: Sometimes used as part of an incentive package.
This answer was drafted with the assistance of Artificial Intelligence.
Get a local agent who gets you
There’s a State Farm agent nearby ready to offer personalized service to fit your specific needs.
Additional coverage options
Simple Insights® on small business
Looking for ways to help keep your small business running smoothly? You’ve come to the right place. Articles from Simple Insights draw on over 100 years of State Farm knowledge.
Insurance needs are ever-changing. Here are some questions to ask an insurance agent to start the conversation and further explore your coverage options.
Benefits are a crucial part of a compensation package. Let’s take a look at some common small business benefits packages.
There are many situations in the business world where employer ownership of a life insurance contract on the life of an employee plays a vital role in the financial life of the business.
Neither State Farm® nor its agents provide tax or legal advice.
Issued by:
State Farm Life Insurance Company (Not licensed in MA, NY or WI)
State Farm Life and Accident Assurance Company (Licensed in NY and WI)
Bloomington, IL
Each insurer is financially responsible for its own products.
IL-39.3