Final answer:
Non-qualified deferred compensation (NQDC) plans often use life insurance for funding within the plan because of the tax advantages, additional avoidance for constructive receipt, and limiting liability benefits.
Step-by-step explanation:
Non-qualified deferred compensation (NQDC) plans often use life insurance for funding within the plan for several reasons:
- Tax advantages: Life insurance products offer tax advantages, such as tax-free death benefits and tax-deferred cash value growth, which can benefit both employers and employees participating in the NQDC plan.
- Additional avoidance for constructive receipt: By channeling the funds through a life insurance policy, the income is not considered constructively received by the participant until death or when the policy is surrendered, providing an additional layer of avoidance for constructive receipt.
- Limiting liability: Life insurance can also help limit the liability of the company sponsor for the NQDC plan. If the plan is informally funded with life insurance, the policy's death benefit can be used to provide the promised compensation to employees in case the company faces financial difficulties.
However, it should be noted that option A is incorrect as life insurance investment products do not necessarily have higher returns than other investment options, and option C and D are also not the primary reasons for using life insurance in non-qualified deferred compensation plans. The correct option is 'b' which emphasizes the tax advantages of life insurance products.