Split-Dollar Insurance: A Versatile Tool for Financial Planning

Split-Dollar Insurance: An Overview

Split-dollar insurance is a flexible financial planning tool that combines life insurance and cash value accumulation. It offers unique advantages for both the policyowner and the insured, making it a valuable consideration for various financial goals.

How Split-Dollar Insurance Works

In a split-dollar insurance policy, two parties share the premium payments and benefits:

1. Policyowner:
* Pays a portion of the premiums, typically equal to the cash value portion.
* Owns the policy and has the right to surrender the policy or borrow against the cash value.

2. Insured:
* Pays the remaining portion of the premiums, typically equal to the death benefit portion.
* Has the primary life insurance coverage.

The cash value component of the policy grows tax-deferred, and the death benefit provides a tax-free payout to the insured's beneficiaries.

Benefits of Split-Dollar Insurance

• Low-cost life insurance: By splitting the premiums, the insured can obtain substantial life insurance coverage at a lower cost than purchasing a policy independently.
• Cash value accumulation: The policyowner accumulates cash value on a tax-deferred basis, which can be used for financial emergencies, investments, or retirement.
• Tax-free death benefit: The death benefit is paid to the beneficiaries tax-free.
• Estate planning: Split-dollar insurance can be used to transfer wealth to beneficiaries while minimizing estate taxes.

Applications of Split-Dollar Insurance

Split-dollar insurance has a wide range of applications, including:

• Key person insurance: Protecting a business against the loss of a key employee.
• Executive compensation: Supplementing executive salaries with life insurance coverage.
• Retirement planning: Accumulating cash value for future income streams.
• Estate planning: Reducing estate tax liability and providing liquidity for beneficiaries.

Considerations for Split-Dollar Insurance

• Potential tax liability: The policyowner may incur taxable income when the cash value exceeds the premiums paid.
• Ownership and control: The policyowner has significant control over the policy, which can lead to potential conflicts with the insured.
• Surrender charges: There may be surrender charges if the policy is surrendered before a certain period.

Table 1: Potential Tax Consequences of Split-Dollar Insurance

Table 2: Split-Dollar Insurance Premiums as a Percentage of Total Premiums

Table 3: Split-Dollar Insurance Applications

Table 4: Advantages and Disadvantages of Split-Dollar Insurance

Is Split-Dollar Insurance Right for You?

Whether split-dollar insurance is a suitable option depends on your individual circumstances and financial goals. Consider discussing the following questions with a qualified financial advisor:

• What is your life insurance coverage need?
• How much cash value accumulation do you want?
• What are your estate planning objectives?
• Are you comfortable with the potential tax consequences of split-dollar insurance?

By carefully considering these factors, you can determine if split-dollar insurance aligns with your financial plans and provides the desired benefits.