Question

Propose an alternative to the taxation of deferred compensation that would be fair to all taxpayers and support the financial needs of the federal government. Indicate substantive ways in which your recommendation would achieve fairness to taxpayers and the United States Treasury.

Answer 1

Life insurance can be an alternate to the taxation of deferred compensation.

A key objective may be to meet competitive life insurance coverage and deferred compensation market practices. Targeting each benefit individually may be more effective – and simpler – than trying to use a combined approach through a life insurance policy. A combined approach often requires the policy to have a very high level of life insurance to support the targeted deferred compensation level, at a level that may be more than the individual needs or wants to carry. The high level of life insurance is also accompanied by higher mortality expenses and may require a more onerous underwriting process.