Thursday, February 26, 2009

Split Dollar Insurance

What is Split Dollar Insurance? You may or may not have heard of this term. It sounds very sophisticated at first, but with a little explanation, this type of insurance is easily understood.

Split Dollar Insurance is when two entities, an employee and an employer, pay premiums and the benefits of a life insurance policy are shared between the two. The policy benefits are split and the costs, or premiums, may be split, as well. The insurance is on the life of the employee. This provides insurance to the employee at a reduced cost.

Why would a company want to have this type of insurance available? It is used to give a reduced cost life insurance policy to an employee. This is viewed as a valuable added benefit to the employee. Therefore, companies can use this sort of insurance as a way to retain employees. Getting good employees loyal and committed to your company is not always an easy prospect. When the good fortune of the company arrives and there is a good group of employees in place, some companies realize that they need to do something to retain these people. Good people are hard to find.

Take, for example, the financial industry itself. At one financial company the brokers and registered representative are doing a good job. They get noticed. But they don’t just get noticed by their own company, the other companies in the industry are hearing about what a good job Joe Smith is doing over at Eastern Financial. Before they know it their employee is trying to be lured over to that company. Of course this other company has a lot to offer, as well. They say well your reputation is impeccable and we want you to come and work for us. Since we know that we have to make it worth your while, we will offer you benefits such as health insurance coverage and a 401(k) plan. But the loyal employee turns down the offer because they realize that they have all of those benefits and more. They also have insurance at a reduced cost. This type of offering made available by the current employer with the split dollar insurance, made a difference to the employee. This was an added benefit that helped make the ultimate decision to not leave a company that takes such good care of their employees.

It is important to understand that split dollar insurance is not a qualified plan. A qualified plan has to meet certain Internal Revenue Code criteria. This means that it qualifies for favorable tax treatment. What is good about qualified plans is that they have tax deductible contributions and tax-deferred growth. Further, there are employers that contribute to these plans. When they do, generally speaking, their contributions to these plans are viewed as a business expense for tax purposes. However, split dollar insurance does not fall into this category.

Moreover, the company is not profiting from the split dollar arrangement, they merely want to recoup their costs. They are usually not looking for a tax advantage either. They just want to be able to offer a fringe benefit to the employee. Usually this type of insurance is selectively offered as an executive perk.

Life insurance can help provide protection and benefits to people in many different situations. The best way to get an understanding of what one’s needs are is to connect with an insurance agent. They can get an understanding of your specific situation and suggest products to provide the best overall answers to one’s needs.

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