Split-Dollar Life Insurance The Overlooked Executive Benefit
Some executive benefits are so commonplace that their names are heard repeatedly in the news. Stock options, restricted shares, cash bonuses, etc. make up the majority of the compensation packages for many executives. But there is an often-overlooked executive benefit that is very powerful for organizations that utilize it: life insurance.
Most employer-provided life insurance is set to provide a benefit amount based on the salary of the employee. For example, the benefit amount is often three to six times the yearly salary of the employee. But for an executive that gets 25% or less of his/her total compensation in the form of salary, that dollar figure seems very insignificant. On top of that, most employer-provided life insurance is capped at around a half-million dollars in benefits per person.
Thus we end up in a scenario where, according to MetLife’s Watch the Gap report:
- 42% percent of highly compensated employees say they are very concerned about the financial effects of a loss of income in the event of a disability and/or premature death.
- 38% of those in this group reported that they did not have sufficient life insurance.
- 51% reported they were looking to their employers for more help in achieving financial security through employee benefits.
How does an employer provide critical executives with the financial security they are looking for?
A Split-Dollar Life Insurance Plan
In a split-dollar life insurance policy, the employer and employee share the costs and benefits of a life insurance policy. The two common forms of a split-dollar policy are:
- Endorsement: The employer owns the life insurance policy, and endorses the contract to specify what portion of the death benefits will be paid to the family of the employee. The employer pays the premiums and generally accepts the amount paid out in premiums back as their portion of the death benefits.
- Collateral Assignment: The employee owns the contract, and the employer loans the employee 100% of the money necessary to pay the premium(s). The death benefit is then assigned as the collateral for the loan, such that when the life insurance policy is collected upon, a portion of the death benefit goes to the employer to pay back the premiums. Publicly traded companies may not use this option due to Sarbanes-Oxley’s prohibition against a company lending money to its own officers.
Why Split-Dollar Plans Make Excellent Benefits
The chief benefit of a split-dollar plan is that the death benefits (regardless of who receives them) are not subject to income tax. From the perspective of the executive, however, it is also generally seen as very positive to have your employer pay the premiums for a high-end life insurance policy. That is a bit of financial security that is hard to come by these days, and it tends to make for a very loyal executive.
Split-dollar life insurance plans may not be suitable for all companies. To learn if this option is right for you, speak with an independent insurance broker. Independent agents work with several of the top insurers in your state and are not bound to any particular carrier. This allows them to freely shop life insurance plans to find the package that best suits the needs and budget of your organization.