30. The Split-Dollar Insurance Plan

A split-dollar insurance plan enables two people to share premium payments toward the purchase of insurance on the life of one of them, generally in the favorable interests of both -- an employer and employee (including a stockholder-employee), or business partners or co-owners, or a parent and child, for example. Fundamentally, such a plan is a method of buying life insurance rather than a reason for buying it.

For sake of illustration here, let's consider a common employer- employee situation. The employee already has a determined need for life insurance, but lacks the entire premium needed to purchase it. The employer has the funds to help finance the purchase of the insurance and has the reason for doing it. Thus, the need is coupled with the combined purchasing power, and a split-dollar plan is the result. There is practically no cost to the employer, and a great deal less cost to the employee when compared with the employee's purchasing the same amount of life insurance personally.

The split-dollar plan is informal in nature; it requires no qualification with the Internal Revenue Service. The employer can freely choose the participating employees without publicity within the corporation.

How the Plan Works

Under a split-dollar plan, the premiums may be split between the employer and the employee in a number of ways. The following two are the more popular:

1. The employer pays the part of the premium which always equals the
annual increase in the policy's cash value. The employee contri-
butes the balance of each year's premium.

This is the conventional method of premium splitting, and is used in many instances. However, it does have one drawback in that the cash value increase in the first year is usually relatively small; therefore, much or
most of the first year premium must be paid by the employee.

2. In order to minimize the financial impact to the employee in the
first couple of years under the plan, the employer's contributions
are leveled over the entire premium-paying period. For example,
assume a plan is adopted for an employee age 45 until retirement
age 65. Instead of paying the annual increase in the policy's
cash value, the employer pays one-twentieth of what the policy's
cash value will be at the end of the twentieth year. The employee
pays the balance of each premium due.

If the employee should die under a plan in which the employer's contributions had been equal to the annual increase in the policy's cash value, the employer will receive the cumulative cash value to date, and the employee's beneficiary will receive all death proceeds in excess of the policy's cash value.

If the employer's contributions had been leveled to reduce the initial outlay to the employee, the employer, at the employee's death, will get back the employer's total contributions to the plan, and the employee's beneficiary will receive all proceeds in excess of the employer's contributions.

In either event, the employer is assured of getting back every dollar it has contributed to a split-dollar insurance plan if the employee should die.

The employer cannot take a deduction for its share of the annual premium contribution but, at the insured employee's death, the employer receives at a minimum, income tax free, every dollar it has invested in the plan. The employee realizes an "economic benefit" from the employer, the value of which must be reported each year as income. Large or small, manufacturing, service or finance, every business organization worth its salt recognizes the need for attracting topflight new blood to the company, and retaining its existing key personnel.

New people are needed to fill tomorrow's top jobs. But the competition for junior executives -- younger people with long-range potential -- is keen. Business organizations have found the split-dollar plan an effective, yet economical, way to emphasize to selected younger employees a bright future within the organization.

A split-dollar plan also helps to discourage the established executive from taking his or her talents and knowledge of the company's business to a competitor. With a continued shortage of executive timber, talented executives, and those with essential specialized skills, employees are in a strong bargaining position. By helping them attain substantial amounts of much-needed additional life insurance protection at bargain rates, their employers have taken a wise business step toward stabilizing their executive employment picture.

Split Dollar Plans

Now the valuable men in your company can own the amount of life insurance they need at astonishingly low cost to them through a Split-Dollar Plan. The employer creates no additional tax liability, though he may not deduct the premiums.

The Employer Gains:

--by hand picking the employees who participate.

--by giving practical encouragement to the future leaders of the
business

--by retention of the most important asset of your firm--your valuable
employees.

--by providing the equivalent of a pay raise at very little cost.

The Employee Gains:

--by the knowledge that his employer appreciates him.

--by the peace of mind and security of adequate insurance.

--by the employer's valuable and practical assistance.

--by immeasurable confidence in his future with the firm
.
Your Plan of Action

Employer:

1. Applies for the insurance.

2. Deposits that portion of the premium which is offset by the
increased total cash value in the policy.

3. Owns and controls the values in the policy.

4. May use his accumulated values to finance retirement benefits or a
deferred compensation agreement.


5. Gives valuable fringe benefits at the small cost of the interest
his deposits might have earned if not loaned to the employee.


The Employee:

1. Is the insured.

2. Pays only the small remainder, if any, of the premium.

3. Controls the disposition of the remaining benefits in the policy
(the pure insurance benefits).

4. Gets large amounts of protection at a small cost.

Tax reference verification 1-800-829-1040

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