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
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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.
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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
### What primarily funds a salary continuation plan?
- [ ] Employee Contributions
- [ ] Retirement Savings
- [x] Life Insurance
- [ ] Employer Paid Trusts
> **Explanation:** Salary continuation plans are typically funded by life insurance policies taken out by the employer.
### Who often acts as the initial beneficiary in a salary continuation plan?
- [ ] The Employee's Spouse
- [ ] Immediate Family
- [x] The Employer
- [ ] A Third-Party Trustee
> **Explanation:** The employer often acts as the initial beneficiary, collects the death benefit from the insurance, and then makes payments to the employee's chosen beneficiary.
### To whom are the salary continuation payments made?
- [x] Employee's Designated Beneficiary
- [ ] The Employer
- [ ] A Charitable Organization
- [ ] Employee's Health Insurance Provider
> **Explanation:** The payments are made to the employee's designated beneficiary, who is often a family member.
### What benefit does a salary continuation plan primarily provide?
- [ ] Medical Expenses
- [x] Income Replacement
- [ ] Educational Grants
- [ ] Retirement Savings
> **Explanation:** The primary benefit of a salary continuation plan is income replacement for the employee's beneficiaries.
### Are salary continuation plans typically an employer-funded benefit?
- [x] Yes
- [ ] No
- [ ] It Depends on the Policy
- [ ] Funded by Employee Contributions
> **Explanation:** Salary continuation plans are typically an employer-funded benefit using life insurance policies.
### How is the death benefit typically used in a salary continuation plan?
- [ ] Paid in a Lump Sum to Beneficiaries
- [x] Distributed by the Employer as Continued Salary Payments
- [ ] Used to Pay off Mortgages
- [ ] Donated to Charity
> **Explanation:** The death benefit is distributed by the employer as continued salary payments to the employee's beneficiary.
### How can an employee ensure their family is the beneficiary in a salary continuation plan?
- [ ] By directly purchasing the insurance
- [x] By designating a beneficiary in the plan agreement
- [ ] By listing them on their retirement account
- [ ] By writing a will
> **Explanation:** The employee must designate a beneficiary in the salary continuation plan agreement to ensure that their family receives the benefits.
### What role does the life insurance policy play in a salary continuation plan?
- [x] It provides the death benefit used for continued salary payments
- [ ] It covers the employee's medical expenses
- [ ] It is an investment for retirement
- [ ] It secures a loan for the employer
> **Explanation:** The life insurance policy provides the death benefit used to fund continued salary payments to the employee’s designated beneficiary.
### Which type of companies most commonly use salary continuation plans?
- [ ] Small Home-Based Businesses
- [x] Larger Corporations and Employers with Key Employees
- [ ] Sole Proprietorships
- [ ] Public Hospitals
> **Explanation:** Larger corporations and employers with key employees most commonly use salary continuation plans due to the significant resources required.
### Can salary continuation plans cover temporary disabilities?
- [ ] Yes, it can
- [x] No, they are primarily for death benefits
- [ ] Sometimes, depending on the employer
- [ ] They always cover both death and disability
> **Explanation:** Salary continuation plans typically provide benefits primarily in the event of the employee's death and are not intended to cover temporary disabilities.
Thank you for deepening your knowledge about salary continuation plans and taking on our comprehensive quiz. Remember, informed decisions are key to effective employee benefits management!
