Split
Dollar Life Insurance
Imagine this scenario.
Your parents are both very hardworking and creative people. Instead of going
the route of a steady 9-5 job, they decided on something much more challenging.
They decided to create their own business. Through lots of hard work and
education the family business became a huge success; so much of a success that
they were able to raise you and send you on to college where you decided to
study business. After your hard work and dedication you leave your university
with a Masters in Business administration. You and your family both agree that
having you work within the family business will be a win-win situation. They
will have the benefit of your University level business skills and you will
gain some valuable life experience as well as a salary. A few years pass by and
your parents decide it’s time for you to take over the reigns of the family
business. What an opportunity. Although you have discovered that you have a few
problems. You cannot afford to pay the insurance premiums of the businesses,
for the existing life insurance policies. What can you do?
This is a scenario that
occurs frequently in family businesses. The parents or business owners have
built their assets up over time. The worker, or in this case family member
cannot possibly take over the life insurance polices of a successful business
that has been in operation for several years. The gap in ages and salaries
presents a problem, however there exists split dollar life insurance that can
help. Split
dollar life insurance basically means that the cost of the premiums can be
split between other parties. The benefit would also be split but it can present
a way forward if the person wanting to take ownership of the business was short
on assets.
There are other benefits
to spit dollar life insurance. Key employees can quite often take part in
their company’s life insurance policy. Through the split dollar method the
employee can gain a greater quantity of life insurance than they could
ordinarily afford. The split dollar method can also help those of advancing age
with health problems obtain life insurance where on their own they may face
difficulty.
Companies can also
participate in split dollar life insurance by offering their employees life
insurance protection. For example, an employer and employee agree to buy a
$100,000 life insurance policy on the employee’s life. When the employee dies,
we’ll say the company has paid $25,000 in premiums. The company, if fully
reimbursed for this amount and the employee’s beneficiaries receive the
remaining $75,000.
Before purchasing a split
dollar life insurance policy with your company, you do need to be aware of tax
considerations. First, the premiums are generally not tax deductible by either
party. The employee needs to consider that if the company grants a bonus to the
salary to pay the premiums then this is subject to tax. This can then be used
as a tax deduction for the employer.
Split
dollar life
insurance can be a great asset. It can make for easy buy-sell arrangements for
businesses as well as make it possible to purchase insurance for other specific
financial goals.
Split
dollar life insurance enables older individuals or those who may find it
difficult to purchase life insurance do so via the help of their companies. The
companies and individual employees can also enter into agreements to purchase
split dollar life insurance with benefits to both sides. With good advice and
clear goals a split dollar life insurance policy can offer you protection and
financial security for the future.