Life Insurance

Insurance for Businesses Series: Split Dollar

Peachie Thompson · September 16, 2021

Successful business owners need ways to protect their companies, compete for top talent, reward employees and plan for a financially secure future. An excellent financial planner understands these needs and know the various roles insurance play in these situations. This is the fourth one of a 5-part series dedicated to businesses and the role of life insurance in solving some of the concerns of business owners.

Split Dollar Plan

A split-dollar life insurance arrangement is a cost-efficient way to offer supplemental retirement income, valuable death benefit protection, or both to the employees the "business/company" selects. The company and the employee agree to share the benefits of a life insurance policy therefore, it is mutually beneficial. Premiums are generally funded exclusively by the business, and the plan can be designed to leverage the amount of policy control the business desires to have.

Advantages for the employee

  1. Potential to have a tax-advantaged income through policy loans and withdrawals, depending on the type of split-dollar arrangement
  2. Income tax-free death benefit for the heirs
  3. A cost-effective way to obtain survivor benefits and supplemental retirement income

Advantages for the business

  1. Employers choose which employees can participate
  2. A plan that’s flexible as well as easy to execute and maintain
  3. Plan design options to help reduce impact to company's financial reporting
  4. Availability of some potential for cost recovery through policy withdrawal

Who is it for?

Businesses:

  • Who are looking to reward key executives with emphasis on the "golden handcuffs"
  • Are more concerned with control of plan assets as well as cost recovery
  • Are okay with forgoing the current tax deductions
  • Who maintain excess cash on their balance sheets for financial reasons
  • Looking to minimize business disruption if a key executive or owner dies prematurely

How does it work?

The business enters into a written split-dollar agreement. This agreement spells out the specific rights and responsibilities of each party, with each selected employee. The employee may pay income tax on the interest expense of the loan or the economic benefit received.

Premiums paid by the business is considered a loan to the employee/insured (not compensation). The employee must pay loan interest to the business. An amount equal to the loan interest is typically bonused to the insured (employee pays tax on bonus received).

Exit strategy: The business may elect to end the split dollar arrangement via cost recovery at death or more commonly, during the working years or at retirement via policy withdrawal. If no recovery desired, then split dollar agreement is typically ended via compensation bonus to the employee from which split dollar loan is extinguished.

Here's a sample graphic to help you:

If you are a fee-only planner, advisor or a client and would like to know more about this topic, please email me at peachie@peachinsurance.net

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