Split Dollar Plans
When it comes to executive employee compensation, the Split Dollar arrangement is a top choice because it helps your key executives to create a large financial legacy while at the same time the company earns a very respectable return on their cash investment.
Spilt Dollar Plans are non-qualified, meaning you can pick and choose the executives to which you’ll offer benefits. You can even offer them to a group that consists of just one executive. Or, you can have one plan for one group of executives, while offering another plan to a different group of executives. And since Sarbanes Oxley went into effect, even public companies can have “Non-Equity Split Dollar” plans for their key executives.
Here’s a brief description of how Split Dollar arrangements work:
- The employer or company buys a large life insurance policy on a key employee and pays the premium through after tax dollars. The employer is the owner of the policy and has access to policy cash value and controls the policy.
- The key executive is the insured and chooses the beneficiary or beneficiaries of the life insurance policy.
- At the death of the key executive, the company receives back the entire premium or cash value whichever is higher. At the same time, the executive’s beneficiaries receive the balance of the death benefit income tax free, as with any life insurance policies.
It’s easy to see how Split Dollar arrangements can be a win-win for both the employer and the key executives, because the employer recaptures the entire premiums paid – with appreciation if the cash value is higher – and the key executive creates a huge financial legacy for his or her family.
Here’s an example for a 53 year-old executive:
- The company buys $5 million worth of whole life insurance and pays $133,400 annual premiums for 13 years (total premiums $1,734,200)
- Because this is a whole life insurance policy, there is no stock market risk and the premiums earn an attractive fixed return. As with other whole life policies, there are three guarantees: stable premiums, an unchanging death benefit and increasing cash value.
- If this executive were to die at age 54, the company would get back $133,400 (the one premium paid) and the executive’s family would get $4,866,600 ($5,000,000 – $133,400)
- If this executive were to die at age 70, the company would get back $2,136,154 ( the cash value is higher than the total premium of $1,734,200) and the executive’s family would get $3,376,482 (now the death benefit is higher $5,512,636 – $2,136,154)
- If this executive were to die at age 88, the company gets back $4,869,852 (the cash value is higher than the total premium of $1,734,200) and the executive’s family would get $1,420,355 (now, both the death benefit and the cash value are a lot higher $6,290,207 – $4,869,852)
- This policy lasts until the executive dies but the amount of split benefits will change. The company can use this cash value as a savings account and utilize it at anytime with few days’ notice. As you can see this cash value has a very good internal rate of return along with tax-deferred growth.
Obviously, the numbers will change for different age groups of executives and different death benefit amounts. Another option is using Guaranteed Universal Life Insurance instead, which would have a lower premium, no cash value build up and higher death benefits for the beneficiaries of the insured.
Whichever way you go about it, Split Dollar arrangements create a win-win scenario for both the company and the key employee! Contact BeamaLife today (800) 554-7822 to find out more.