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Split Dollar Insurance

SPLIT DOLLAR LIFE INSURANCE

Split dollar life insurance refers not to a type of policy, but to a method of paying for and division of the beneficial interest in a policy.

There are basically three elements of a permanent insurance policy which can be split; namely, the ownership, the beneficiary designation, and the payment of premiums. Although there are numerous types of variations, the basic approaches to split dollar arrangements are described below.

OWNERSHIP

Collateral Assignment Method The employee owns the policy and assigns certain interests in the policy to the employer as collateral for the payments made by the employer.

Endorsement Method The employer owns the policy, but a written endorsement is added to the policy which splits the rights between the employer and employee.

BENEFICIARY

Employer Share Typically, the employer will receive back the cash value of the policy or total premiums paid, whichever is greater.

Employee's Share The employee's beneficiary receives the balance of the policy proceeds; i.e., the face amount less the cash values (or premiums) paid back to the employer.

PREMIUM PAYOR

Classic Approach The employer pays the portion of the premium equal to the increase in the cash value. The employee pays the balance.

Employer Pay All The employer pays the entire premium and the employee pays income tax on the economic value of the employee's share of the death benefit.

Executive Bonus Plan The employer pays the employee a bonus in the amount of the economic benefit, which is deductible to the employer and taxable income to the employee. The employer also pays the balance of the premium to the insurance company (nondeductible). The employee pays the economic benefit portion of the premium from the proceeds of the bonus. The employee is taxed on the bonus. Some plans also pay a bonus to cover the tax due.

USES OF SPLIT DOLLAR LIFE INSURANCE

1) Fringe Benefit Since the employer can pick and choose those employees who will benefit, split dollar can be used to attract and retain key employees.

2) Estate Planning When the estate is sufficiently large to produce Federal Estate Tax; e.g., net worth in excess of $600,000, an estate owner may consider removing life insurance from his or her estate. A split dollar arrangement may be an attractive way to lower the estate value by having an irrevocable life trust or family member to pay for the cost of death benefit protection.

3) Business Continuation In a small family owned business there may be less than desirable tax consequences using an arrangement whereby the corporation redeems the deceased owner's stock.

Using the cross-purchase buy-sell agreement may reduce this problem. However, the premiums may be too costly for some stockholders.

A split dollar arrangement can be used to assist each stockholder in purchasing enough insurance on the other stockholder(s).

4) Group Term Replacement Due to antidiscrimination rules the amounts of group term insurance on key executives may be limited. With a split dollar plan the executive can have increased protection now, plus substantial benefits at retirement age.