Death Benefit Plans
In a Death Benefit Plan, the employer makes a legally binding promise to the employee that if, he or she should die while employed with the Company, or following retirement with the Company, it would pay his or her beneficiary a defined death benefit amount (e.g., multiple of salary or $xxx per year for 10 years). A life insurance policy equal to the amount of the promised benefit is purchased by the Company on the life of the employee. The Company is both the owner and beneficiary of the policy. Upon the death of the employee, the Company receives the death proceeds that are generaly income tax-free, which it could use to pay the promised benefits to the beneficiary, or use to purchase a tax-free investment (such as a municipal bond) in which the annual income could be used to pay the benefits. The growth in the life insurance policy and subsequent death proceeds paid to the Company generally help to recover the overall cost of the plan to the Company.