Split-Dollar Insurance: 4-Figure Tax Savings for 6-Figure Estate Planning

What is Split-Dollar Insurance?

Split-dollar insurance is a life insurance policy where two parties share the costs and benefits of a single policy. Typically, an employer and an employee enter into a split-dollar agreement to provide financial protection and tax advantages.

How Does Split-Dollar Insurance Work?

• Employer: Pays the premiums for a life insurance policy on the employee's life.
• Employee: Reimburses the employer for the premiums paid on the cash value portion of the policy.
• Death Benefit: Upon the employee's death, the death benefit proceeds are paid out.

Benefits of Split-Dollar Insurance

1. Tax-Free Death Benefit for Beneficiaries

The death benefit proceeds received by the employee's beneficiaries are generally tax-free.

2. Low Cost of Insurance for Employees

Employees only repay the premiums on the cash value portion of the policy, which is typically lower than the premiums for a traditional life insurance policy.

3. Supplemental Retirement Savings

The cash value component of the policy grows tax-deferred, providing a potential source of supplemental retirement income.

4. Estate Planning Advantages

Split-dollar insurance can help reduce estate taxes by excluding a portion of the policy's death benefit from the employee's taxable estate.

4 Pain Points Addressed by Split-Dollar Insurance

1. High Cost of Traditional Life Insurance: Split-dollar insurance offers a more affordable way to obtain life insurance coverage.
2. Limited Estate Planning Options: Split-dollar insurance provides an estate planning tool to reduce estate taxes and protect beneficiaries.
3. Lack of Supplemental Retirement Savings: The cash value component of split-dollar insurance can serve as a valuable supplement to retirement savings.
4. Employee Disengagement: Split-dollar insurance can motivate employees by providing financial security and retirement planning benefits.

4 Tips for Maximizing Split-Dollar Insurance Benefits

1. Choose an Appropriate Policy: Consider the employee's age, health, income, and estate planning goals.
2. Optimize Premium Allocation: Dedicate the maximum allowable premiums to the cash value portion to minimize employee repayments.
3. Plan for Estate Tax Savings: Design the policy to minimize estate taxes by excluding a substantial portion of the death benefit.
4. Seek Professional Advice: Consult with a tax advisor and insurance professional to ensure the split-dollar arrangement is structured correctly.

4 Real-World Examples of Split-Dollar Insurance

Example 1:

• Employer pays $20,000 annual premiums.
• Employee reimburses $7,000 for cash value premiums.
• Death benefit: $1 million
• Tax savings for employee's beneficiaries: Approximately $700,000

Example 2:

• Employee: High-income professional with a taxable estate of $5 million
• Split-dollar death benefit: $1 million
• Estate tax savings: Approximately $250,000

Example 3:

• Employer: Small business owner with limited retirement savings
• Split-dollar cash value portion: $50,000
• Supplemental retirement income: $2,500 annually for 20 years

Example 4:

• Employee: Key employee who is essential to the business's success
• Split-dollar death benefit: $1 million
• Employee motivation and retention: Increased job satisfaction and loyalty

4 Emerging Applications of Split-Dollar Insurance

• Charitable Planning: Split-dollar insurance can be used to fund charitable gifts, providing tax benefits and ensuring a legacy.
• Business Succession Planning: Split-dollar insurance can provide liquidity for business succession by allowing key employees to purchase the business from deceased owners.
• Education Funding: Split-dollar insurance can help fund college expenses for the policyholder's beneficiaries, providing a head start on higher education.
• Wealth Transfer: Split-dollar insurance can be used to gradually transfer wealth to future generations, providing financial security and estate planning benefits.

4 Questions to Engage Customers

1. Are you concerned about the high cost of life insurance and estate taxes?
2. Do you have limited retirement savings and want to explore supplemental income options?
3. Would you like to motivate your employees by providing them with financial security?
4. Are you looking for innovative ways to plan for charitable giving or business succession?

Conclusion

Split-dollar insurance offers a unique combination of financial protection and tax advantages, making it a valuable tool for estate planning, retirement savings, and employee benefits. With its versatile applications and customizable structure, split-dollar insurance can meet a wide range of financial and personal goals.