Dividing the dollar

You can use life insurance in many ways as a part of business planning, but any method will prove pointless without sufficient funding to pay the premiums.

Here’s a way to avoid that dilemma — and enjoy certain tax benefits. It’s called a split-dollar plan.

A split-dollar plan is an agreement that allows for payment of the insurance premiums, cash values and death benefits to be divided between two parties, one with an insurance need and the other with adequate funding to pay for it. Generally, a corporation is named as the primary funding party and a corporate employee is named as the insured.

A split-dollar plan also can involve family members, trustees or any two entities in a situation in which one has the money for premium payments and the other has an insurance need.

Two types

You can set up a split-dollar plan in two ways: collateral assignment or endorsement. The collateral assignment plan names the employee as the applicant and policy owner. The employer, who makes the premium payments, receives ownership interest in the policy as collateral.

The endorsement plan names the employer as the policy owner and gives the employer the rights to the portion of the policy’s cash value and death benefits that would be equal to the premiums paid. The employer would then endorse an ownership interest in the death benefit and cash value to the employee’s beneficiary.

This method is used by corporations that want to retain the utmost control over the policy or for policies that would eventually be corporately owned.

The advantages

Split-dollar plans can be used as fringe benefits to attract and retain key employees. Also, employers can choose to whom they offer split-dollar insurance. Besides receiving life insurance at an affordable rate, key employees also receive certain tax advantages, since the policy values grow tax deferred, the death benefits are generally received income tax free, and the employees’ taxes are based only on the economic benefit received annually from the plan, which is a fraction of the total premium payments.

Consider these other benefits:

  • Split-dollar plans can be used in estate planning when the estate’s value exceeds $675,000 (for 2000), which would make it large enough to incur federal estate taxes. In this situation, a split-dollar insurance plan can be used to reduce the out-of-pocket costs of the insured.

  • These plans can be used in a business continuation plan for a family-owned business because they enable each stockholder to purchase enough insurance on the other stockholder(s) at more affordable rates.

  • Split-dollar plans can be used to provide more insurance to key executives, who are limited by anti-discrimination rules on the amount of group term insurance they can have.

The bottom line on split dollar plans is that they offer a unique and cost-effective way for employers to provide low-cost insurance protection to shareholders or key employees while enjoying certain tax advantages during the life of the policy. Louis P. Stanasolovich, named as one of the best financial advisors in America the last four years by Worth magazine, is founder and president of Legend Financial Advisors, Inc., a fee-only financial advisory firm located in the North Hills of Pittsburgh. Legend provides asset management and comprehensive financial planning services to individuals and businesses. Reach him at (412) 635-9210. The firm’s Web address is www.legend-financial.com.