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The Death Benefit Only Plan for Non-Profits
The Death Benefit Only (DBO) Plan for Non-Profits is an arrangement in which the employer, a 501(c) non-profit organization, agrees to pay the actuarially determined cost of the current death benefit on a permanent life insurance policy to be owned by the employee or employer. The employer and employee enter into a written agreement that ordinarily requires the employer to make premium payments as long as the employee works for the employer. The employment agreement also requires the employee to execute a “co-ownership” or “restrictive endorsement” at the time the policy is purchased.
The co-ownership agreement would set forth the terms of the restrictive endorsement and the timing of its release. The employee will own the policy, the co-ownership agreement of the Plan will provide access to the policy by the employee, and the actuarial cost of the current death benefit will be deductible by the employer and not taxable to the employee. The economic benefit of the death benefit coverage will also be taxable to the employee. Any monies contributed by the employee or otherwise taxable to the employee will be a credit against the employee's economic benefit taxation. The Non-Profit executive bonus received by the employee is in the form of permanent life insurance owned by the employee. The life insurance policy can be continued after the employee's disability or retirement. The employee's named beneficiary may receive the life insurance proceeds income tax-free.
The cash value of a permanent life insurance policy grows on a tax-deferred basis. Because the Co-Ownership Agreement will lapse at, or prior to, the employee's retirement, the executive will have access to the policy's cash value during retirement. Withdrawals from the policy can be made on an income-tax free basis up to cost basis. Policy loans can also be taken without income tax consequences.
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