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Split Dollar Insurance
Split-Dollar Life Insurance and Deferred Compensation
Split Dollar Life Insurance plans are a cost- and tax effective method of providing multiple benefits using life insurance. Split Dollar Life Insurance gets its name because it involves splitting the premium payments and policy benefits of a life insurance policy between you and your key employee. Here’s how it typically works:
• You pay the Split Dollar Life Insurance premiums
• There are two types of ownership:
Endorsements: You are the purchaser and owner of the policy and there is an agreement between you and the insured employee that defines the employee’s rights to the policy.
Collateral Assignments: Your employee purchases the Split Dollar Life Insurance policy and is the owner of the policy. The employee then makes a collateral assignment of the policy to you in return for you paying all or part of the policy premiums.*
• You are entitled to all of the policy’s cash value
• When the employee dies, you can recoup the premiums you paid into the Split Dollar Life Insurance policy or receive an amount equal to the total cash value that’s accumulated in the policy, whichever is greater.
• The balance of the death benefit is paid to the employee’s beneficiary A split dollar plan is tax effective for the employee. Instead of paying full Split Dollar Life Insurance premiums with after tax dollars, the employee’s annual cost is limited to a taxable economic benefit based on the employee’s share of the death benefit. In addition, the death proceeds received by the employee’s beneficiary are income tax free.
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Whether you own a closely held business or you are a senior executive in a major corporation, you know that your business is dependent on the capabilities of your key people. Keeping key people is critical to the long-term success of your business. Increasing their compensation, enhancing incentives and adopting new fringe benefits add to business overhead. Balancing the impact on the bottom line with the need to retain experience and expertise can be a challenge in today’s marketplace.
Split Dollar Life Insurance is a cost and tax effective method of providing life insurance protection to your key employees. The overall plan is tailored to meet the needs of your business and each key employee that you choose to cover. Moreover, as the owner of a business, you can obtain significant personal benefits from a Split Dollar plan of your own.
How Split Dolla r works
Fortunately, the most basic Split Dollar Life Insurance arrangements are easy to set up, easy to understand, and easy to administer. The life insurance policy can be owned either by your business (Endorsement Split Dollar) or by the employee (Collateral Assignment Split Dollar). Whichever choice is made, the business will own all of the cash value of the policy at all times. This cash value can be accessed directly if the business is the owner of the policy, or through a collateral assignment form if the employee is the policyowner. A third party, such as the employee’s irrevocable life insurance trust, can also own the Split Dollar Life Insurance policy.
Under the Split Dollar arrangement, upon the key employee’s death, your business will receive a portion of the death benefit equal to the greater of the premiums paid or the cash value of the Split Dollar Life Insurance policy just before the employee’s death. The employee’s beneficiary will receive the remainder of the death proceeds.
Imp roving the basic, simple plan
Split Dollar Life Insurance by itself is great if the employee dies while the plan is still in effect, but what happens at retirement? Your business can create a supplemental executive retirement plan (SERP), using your business’ interest in the life insurance cash values to fund the promised benefits. Withdrawals can be taken from the policy to distribute to the employee, or the entire policy can be transferred to the employee in a lump sum at retirement. As a form of “golden handcuffs,” the promised benefit to the employee can be made contingent upon the employee fulfilling certain requirements, such as remaining employed for at least ten years.
Tax co nsequences
In exchange for the employee’s beneficiaries receiving an income tax free death benefit from the life insurance policy paid for by your business, the employee is required to include in income the economic value of the current year’s death benefit protection each year that the Split Dollar arrangement remains in effect. This value is calculated based upon the employee’s age using either the Internal Revenue Service (IRS) Table 2001 rates or the insurance company’s alternative qualifying term insurance rates.
At the employee’s retirement, the employee will be taxed on the value transferred from your business under the SERP arrangement. The business receives a deduction equal to the amount of compensation reportable by the employee. The business’ tax savings could be used to gross-up the employee’s compensation sufficient to cover the employee’s taxes on the distribution of the policy. Note that any promise, understanding or agreement by the employer to provide compensation (including a tax gross-up) at retirement or at any time in the future constitutes Deferred Compensation within the definition of section 409A of the Internal Revenue Code. Any such arrangement must be fully compliant with the requirements of the IRC 409A.
S ummary of employer advantages
• Employee Loyalty
• Selectivity
• Low Cost – Cost Recovery
• Disability Protection with Waiver of Premium Rider
• Employer Control of Policy
• Documented plan eliminates question of whether future salary continuation represents reasonable compensation
Please call us today at 866-392-INFO (4636)
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This split dollar benefit allows you to offer life insurance to valued employees at a reduced rate. You own the policy on an employee’s life: you and the employee both pay the premium. When the employee dies, you receive the policy’s accumulated cash value or the total premium paid, whichever is greater. The employee’s beneficiary receives the remaining death benefit. |
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