If you own a business, using a split dollar life insurance plan can help you shift business income to you on a tax effective basis, without involving other employees!
Split dollar life insurance refers to the concept of two or more parties splitting the benefits and costs of a life insurance policy, such as the premium, death benefit and cash value.
The most common type of split dollar life arrangement involves an employer and the employee or owners, with one part owning the policy, one or both parties’ contribution to the annual premium, but both parties having a vested interest in the policy benefits.
Split dollar plans are inexpensive and easy to administer as an executive benefit arrangement.
Here is how it works:
One party establishes a cash value life insurance contract under the ownership of the key executive.
The employer receives a “collateral assignment” against the policy, entitling the corporation to receive the lesser of the policy cash value or the outstanding loan balance. The loan is based on the premiums contributed by the company. The same assignment entitles the employer to a portion of the policy death benefit, equal to the outstanding loan balance.
The key executive pays the taxes each year on the foregone interest on the loan from the corporation to pay the premium.
At some point in the future, the split dollar arrangement terminates when the employer’s loan is repaid (typically from the policies cash value), leaving the executive “free and clear” ownership of the accumulated gain in the life insurance policy.
The executive can access the accumulated gains in the policy by borrowing against it, which will typically allow for tax-free access to the values. The policy loan is repaid to the insurance company at the death of the executive, and any residual death benefit is paid to the executives’ named beneficiaries.
Split dollar is an easier benefit to implement than deferred compensation, and less expensive for the employer.
- Easy account entries
- Recovery of the cost for the employer
- Performance objectives to trigger the funding for employer
- Very little if any impact on company balance sheet
- A “golden handcuffs” for the employer and ability to set restrictions when cash value can be accessed
Today’s newer types of life insurance policies enhance the benefits of a split dollar plan! Continue reading “Shift Corporate Income For Your Personal Retirement! “