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Split-dollar insurance makes a great perk

If I could start a new trend, it would be eyebrow and nose piercing in my profession -- accounting. I think there's money to be made manufacturing calculator-shaped nose rings.

And if that doesn't catch on, I'd like to see another trend, this time in employee compensation. You see, employees aren't exactly entitled to claim a plethora of deductions. Never have been. Never will be. So why is it that employers insist on, and employees accept, straight salary as the only source of compensation? Salary is fully taxable, and not particularly creative.
The perk

I've written before about non-taxable benefits that employers can offer their employees (see http://www.timcestnick.com). Today, I want to share a different type of perk that is quite creative. I'm talking about life insurance. Specifically, split-dollar life insurance.

You see, a universal life (UL) insurance policy has two essential components to it: The death benefit (or face amount) of the policy, and the investment component. A portion of each premium dollar that you pay on the policy covers the "net cost of pure insurance" to fund the death benefit, while the remainder goes into a growing pool of investments inside the policy (if you opt to invest in the policy, which can make sense since investment earnings grow tax-sheltered inside the policy). Both the death benefit and investment component of the policy are paid out tax-free at the time of the insured's death.

You need to understand that the investment component of the policy can be accessed by the owner of the policy, perhaps to supplement retirement income from other sources.

Amounts invested in the policy can be withdrawn on a taxable basis, or accessed in other tax-free ways.
The plan

How do you as an employee fit into this picture? You see, it's possible for a UL policy to be owned by more than one person. In fact, it's possible to split the ownership so that your employer can own the death benefit of the policy, while you own the investment component of the policy. This is known as a split-dollar insurance arrangement.

This arrangement should be formalized by a written agreement between you and your employer.

Your employer would be responsible for paying that part of the premium that relates to the death benefit, while you would be responsible for the balance of the premium -- the portion that goes into the investment component of the policy.

This arrangement can be a real perk, because you have the opportunity to take advantage of tax-sheltered investing inside a life insurance policy without having to pay for the actual cost of the insurance (your employer pays for that).

I like one more twist on this, however.

Why not negotiate to have your employer pay your share of the premium in addition to his own? This will result in a taxable benefit to you, but it will still cost you less than paying for the premium yourself.

Further, your employer should be able to deduct the cost of this employee benefit (although I recommend adding this benefit to your employment contract to strengthen the argument that it's deductible to your employer.)

If you're also a shareholder, the employee benefit may not be deductible.
The result

Consider the result. If you're a non-smoking male, age 45, your employer can purchase a UL policy with a $450,000 death benefit that will cost $10,000 in premiums annually if the intent is to build up as much as possible in the investment component of the policy. If your employer owns the death benefit, his premium will be $4,010 annually. The balance of $5,990 is your share, and goes into the investment component.

If you were to retire at age 65, you'd have $297,373 in the investment component of the policy available to you. By age 70, that amount is projected at $462,371. By age 80, the amount would be $1,032,595. These numbers, calculated by Manulife, assume a 6-per-cent annual rate of return.

Upon your death, your beneficiaries will receive, on a tax-free basis, any amount still left in that investment component of the policy. As for your employer, he'd receive the $450,000 death benefit tax-free, as a reimbursement of those costs he paid on the policy over the years.
tcestnick@aic.com



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