Split Dollar Plan Utilizing Life Insurance

A split-dollar plan using life insurance is a financial arrangement between an employer and an employee (usually a key executive) that involves sharing the costs and benefits of a life insurance policy. In most cases a split-dollar plan is used as an executive compensation or key-person strategy.

In a split-dollar plan, the employer and employee enter into a formal agreement that outlines how the premiums, cash values, and death benefits of a life insurance policy will be divided between them. It’s a win-win for both parties:

• Attract and retain key executives: Offering a split-dollar plan can be an attractive executive compensation strategy that helps attract and retain talented individuals.
• Deductible premium payments: Employers may be able to deduct the premium payments made on behalf of the employee, potentially reducing their taxable income.
• Recovery of premiums: Depending on the type of split-dollar plan, employers may be entitled to receive back the premiums paid upon the death of the employee, effectively recouping their investment.

• Enhanced life insurance coverage: Key employees can obtain significant life insurance coverage without incurring the full cost of premiums, as the employer typically contributes a portion or all of the premiums.
• Reduced out-of-pocket costs: By sharing the premium payments with the employer, key employees can enjoy reduced out-of-pocket expenses associated with life insurance coverage.
• Long-term savings and cash value accumulation: The policy's cash value grows over time, potentially providing key employees with a source of tax-deferred savings or a loan option using the policy's cash surrender value.
• Estate planning benefits: Life insurance death benefits can be used for estate planning purposes, providing financial security for beneficiaries or funding estate taxes.

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How does a split dollar plan utilizing life insurance work?

There are two common types of split-dollar plans that utilize life insurance.

Endorsement Split-Dollar Plan:

Under this type of plan, the employer pays the premiums for a life insurance policy owned by the employee. The employer is usually entitled to receive back the premiums paid upon the death of the employee, and the employee's beneficiaries receive the remaining death benefit.

Collateral Assignment Split-Dollar Plan:

In this type of plan, the employer provides a loan to the employee to pay the premiums of a life insurance policy owned by the employee. The loan is secured by the policy's cash surrender value or death benefit. Upon the death of the employee, the employer is repaid the loan amount plus interest, and the remaining death benefit goes to the employee's beneficiaries.

In any case, a split-dollar plan allows the employee to obtain life insurance coverage with a reduced out-of-pocket cost since the employer typically pays a portion of the premiums. It can also serve as a long-term savings vehicle for the employee since the policy's cash value accumulates over time. The employer benefits from the arrangement by using the policy's cash value to recover the premiums paid or to secure a loan repayment.

Why Life Insurance?

But why is life insurance used in a split dollar arrangement? In other words, what are the features of a life insurance policy that allow it to serve as the cornerstone to a well-structed split dollar plan that benefits both employers and key employees?

Cash value life insurance, specifically indexed universal life (IUL) insurance, is a powerful tool that can be used to grow funds without significant tax consequences because indexed universal life (IUL) insurance:

• Has income-tax-deferred growth of values
• Is not subject to IRS contribution limits
• Does not have a 10% penalty for early access
• Does not have Required Minimum Distributions (RMDs)
• Is creditor protected (in most states)
• Has an income-tax-free death benefit 

It's worth noting that the tax treatment may vary based on factors such as who owns the policy, who pays the premiums, and who receives the death benefit. It's essential to consult with a qualified financial advisor or tax professional to understand the specific implications and regulations in your jurisdiction.

Do you think one of your business owner clients may be interested? Input your information below and we will send you a sample proposal from our software explaining this strategy, which you may share with your client(s).