In recent years, split-dollar life insurance arrangements have made a comeback as a key benefit strategy for businesses who want to incentivize their key employees. These plans allocate the cost and benefits of a life insurance policy to maximize tax advantages for the employer and employee.
What Is Split-Dollar Life Insurance?
Split-dollar life insurance is not a life insurance product, but rather, a strategy that allows two parties, typically an employer and employee to share both the costs and benefits of a permanent life insurance policy.
Split-dollar is not a new strategy. It has been around for decades but is seeing a resurgence in popularity due to the many advantages for both the employer and employee.
The value of a split-dollar plan for an employer depends on their needs and goals. Some of the more desirable benefits for employers are:
* Strengthening the employer/employee relationship
* Employee feels more valuable to the company, which increases retention and loyalty
* Plan is easy to administer and requires no long-term cost to the employer
* Control of a traditional split -dollar plan remains with the employer
* Future repayment of premium advances become an asset on the employer balance sheet
The insured employee under the life insurance policy in the split- dollar plan shares certain benefits as well. Chief among them is that the employee uses corporate funds to meet his or her personal life insurance needs in a low-cost and flexible way. Employee split-dollar benefits include:
* Inexpensive death benefit protection
* Lock in current insurability rates
* Coverage that may extend beyond the employee's retirement
* Potential tax-free retirement income via policy cash value
* Use of corporate funds
What does this look like?
At a high level the structure of split-dollar is simple. An employer funds premium for a permanent life insurance policy. The policy is owned by the insured employee or a trust for their family’s benefit. The employee owes the employer the premium advances (in some cases the policy cash value), typically paid back at death from the death benefit. Annually, the employee is responsible for some taxable income for this structure. There is a lot of flexibility in how the plan can be designed, which makes this a powerful tool.
While the basics of this plan are simple the actual design of the arrangement can be quite complex with IRS regulations and long-term planning decisions being important considerations. It is best to seek professional advice when designing the plan.