How to design an executive benefits program

Executive overview

Executives represent a small share of headcount but carry outsized risk: losing one can destabilise the business and attract competitors. Standard compensation packages don't address the financial gaps executives face, nor the organisational exposure when one departs.

Three policies close these gaps: an expanded disability policy, key person life insurance, and a buy-sell agreement.

Retaining and protecting executives requires customised policies that go beyond standard employee benefits.

Expanded short- and long-term disability

• Standard disability pays 60% of salary, capped at $5,000/month.
• An executive earning $200k receives only 30% effective coverage under a standard policy.
• Purchase a supplementary disability policy specifically for executive roles.
• The supplementary policy can cover the remaining income gap or the full paycheck.
• Monthly maximum can be set to any designated amount.
• Signals trust and demonstrates the executive's value to the organisation.

Key person life insurance

• Pays out to the organisation, not the individual — protects the business on the executive's death.
• Term insurance: lower cost, expires — suited to roles tied to a defined project or period.
• Permanent insurance: higher cost, lasts the executive's lifetime; builds cash value the organisation can borrow against.
• Appropriate for owners, part-owners, and former owners whose reputation drives company value.
• Also applicable when a key employee's loss would cause direct financial or reputational damage.
• Supports partnerships where surviving partners want the option to buy out deceased partner's shares.

Buy-sell agreements

• A binding contract defining what happens to a partner's shares if they die, retire, or leave.
• Funded by a life insurance policy; surviving partners or the business are beneficiaries.
• Cross-purchase agreement: remaining partners buy the departing partner's shares directly.
• Entity purchase agreement: the business itself buys the shares.
• Without one, ownership can transfer to a spouse or heir with no operational role.
• Holds cash value, giving the organisation additional financial flexibility.
• Work with an attorney to define a business valuation formula and share distribution rules.
• Revisit the agreement regularly as the business grows and becomes more complex.

Tax considerations

• Purchasing and funding policies in a high-revenue year can reduce taxable income.
• Tax-free policy funding typically results in a higher tax rate on payout.
• Every situation differs — consult a broker before structuring the program.