How does deferred compensation relate to business life insurance?

Non-qualified deferred compensation (NQDC) plans allow executives to defer current income to future years—typically retirement—when they may be in a lower tax bracket. Life insurance is commonly used to informally fund these obligations.

The business promises to pay future deferred compensation but doesn't set aside assets in a formal trust for the executive's benefit (that would be constructive receipt, triggering immediate taxation). Instead, the company purchases corporate-owned life insurance (COLI) policies informally earmarked to fund these future obligations.

The COLI cash value grows tax-deferred, and death benefits are tax-free to the business. When the executive's deferred compensation is paid in retirement, the business can use policy distributions or death benefits to fund these payments.

For Nevada businesses, NQDC plans offer flexibility unavailable in qualified plans (no contribution limits, no non-discrimination requirements) and allow executives to defer very large income amounts. They're particularly popular for high-earning executives in sectors like gaming, healthcare, and technology.

A key risk: NQDC benefits are unsecured promises of the employer—if the company goes bankrupt, executives may lose deferred amounts. This is why NQDC is generally considered appropriate only for financially stable, well-capitalized businesses.

Agents in our network work with business attorneys and plan administrators to structure these arrangements appropriately.