Salary Continuation Plan

A salary continuation plan is an arrangement often funded by life insurance to continue an employee's salary in the form of payments to a beneficiary for a certain period after the employee's death. The employer may act as the beneficiary, collecting the death benefit and making payments to the employee's designated beneficiary.
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Definition

Salary Continuation Plan

A Salary Continuation Plan is a mechanism designed to extend the deceased employee’s income to a beneficiary over a predetermined period. Companies typically fund these plans through life insurance policies. Upon the employee’s death, the employer claims the death benefit from the life insurance policy and proceeds to make scheduled payments to the designated beneficiary.

Key Features

  • Funding: Often funded by life insurance.
  • Beneficiary: Payments are made to a designated beneficiary, which can be a family member or another individual chosen by the employee.
  • Employer Role: The employer may act as the initial beneficiary to claim the death benefit and then disperse it to the employee’s chosen beneficiary.

Examples

  1. Corporate Plan: A corporation has a salary continuation plan for its executives. Upon an executive’s death, the life insurance policy pays out to the company, which then continues to make bi-weekly payments equivalent to the deceased’s salary to their family for a predetermined number of years.

  2. Smaller Business Arrangement: A small business owner purchases a life insurance policy for a key employee. Upon the employee’s death, the business owner collects the death benefit and makes monthly payments to the employee’s spouse for five years as a salary continuation.

Frequently Asked Questions

Q1: Who typically funds the salary continuation plan?

  • A: Employers usually fund the plan using life insurance.

Q2: Who receives the death benefit from the life insurance policy?

  • A: The employer typically collects the death benefit and is responsible for distributing it to the employee’s designated beneficiary.

Q3: How long do the payments last?

  • A: The duration of the payments is predetermined in the plan and varies depending on the employer’s policy.

Q4: Can an employee’s family directly receive the death benefit from the life insurance policy?

  • A: Generally, the death benefit is paid to the employer, who then disburses it to the employee’s beneficiary.

Q5: Does the employee need to contribute to the policy premiums?

  • A: No, the employer typically handles the premium payments for the life insurance policy.
  • Life Insurance: A contract that pays out a sum of money upon the insured individual’s death.
  • Death Benefit: The amount paid to a beneficiary upon the policyholder’s death.
  • Beneficiary: The individual or entity designated to receive the death benefit.

Online References

Suggested Books

  • “Life Insurance: A Consumer’s Handbook” by James H. Hunt
  • “Understanding Employee Benefits Law” by Katharine Batista
  • “The Tools & Techniques of Life Insurance Planning” by Stephan R. Leimberg

Fundamentals of Salary Continuation Plan: Insurance Basics Quiz

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