Golden handcuffs is a term used to refer to company benefits that encourage key employees to remain with their employers for long periods of time. Traditionally used by large corporations, these benefit strategies can be valuable tools for the small business owner. If used properly, they can provide peace of mind and increase the value of a company when it comes time to sell.
The golden handcuffs strategy is built on a life insurance strategy using what is called a split-dollar regime.
The employer takes out a large life insurance policy on the key employee that accumulates cash value. The employer and employee enter into a contract whereby the employer makes the premium payments which are classified as a loan to the employee secured by the death benefit. Should the employee die, all death benefit above the loan portion would go to the employee’s beneficiaries. Upon reaching a certain tenure with the company, say 20 years, the employer agrees sign over ownership of the policy to the employee. Once the agreed upon tenure is reached and the employee leaves, the premium loan is repaid from the cash value and the employee is free to keep the rest. Should the employee choose to leave before the tenure is reached, the policy is surrendered and the employer keeps the cash value.
The key to a successful strategy lies in the construction of the policy. Choosing the right carrier, premium level and internal mechanisms will result in the maximum cash value and the success of the program.