Split-Dollar Life Insurance: a significant benefit a business owner can offer top employees, that in the long run costs little or nothing.
This strategic arrangement is structured to benefit both employee and employer. Split-dollar life insurance contracts are most often used by companies and closely held businesses to achieve two goals simultaneously- decrease the financial impact of losing a key executive or employee and as an executive benefit, such as a Supplemental Executive Retirement Plan (SERP) to help retain top talent.
How does a split-dollar life insurance plan work?
Split-dollar life insurance is a contract under which the premium payments and death benefit of a permanent insurance policy with a cash value is shared, usually between an employee and their employer.
Permanent life insurance is relatively expensive, and is cost prohibitive to many employees. The prospect of having the employer pay most, if not all of the premiums is a significant benefit which can build morale with current employees, help retain employees and even be used to attract new talent.
In addition to death benefit coverage, one or both parties may get access to the cash value, Tax Free, depending on the contract agreed upon between the employer and employee. This cash value is money which can be withdrawn or borrowed against later in life by the employee as a tax free asset, or by the business for investment capital.
There are different techniques used in the application of the split-dollar insurance contract, The Endorsement method and the Collateral assignment method.
Endorsement method-When your employer owns the policy, but you get the benefits,The Endorsement method allows the employer to own the life insurance policy, allowing for the employee to name a beneficiary of the policy. It also explains what will happen upon employee’s retirement.
Collateral assignment- you own the life insurance, but your employer pays the payments this allows the employee to own the cash-value life insurance policy and the premiums paid by the employer will be considered similar to a loan. At retirement, the employee will pay back the employer for the premiums it had paid and the employee will do whatever he or she wants with the remainder.
There are many factors to consider before purchasing a policy, such as the type of policy, who is eligible to receive the death benefit, cash value and tax implications. Understanding the different types of plans and options can help you decide which type will work best for your employer’s needs. If you’re looking for ways to provide employees with an affordable and effective benefit we can help. Call us at 248-362-1313 or fill out the form below.
