What is Split-Dollar Life Insurance?
Employee benefits are a necessary recruitment and retention tool for credit unions to compete with other employers for top talent—and life insurance is often a key component of these benefit packages.
There are many life insurance products available to employers, but split-dollar life insurance plans have become increasingly popular in recent years. Since split-dollar life insurance plans first became popular in the 1980s, the usage of these arrangements has continued to grow.
Today, especially for credit unions, it’s important to understand these types of executive compensation arrangements.
While more popular today than in the past, split-dollar life insurance arrangements can be complex and difficult to understand. This is why we’re here—at Acumen Financial Advantage—to explain this form of executive compensation further.
Listen to Scott B. Hinkle, Principle at Acumen Financial Advantage, discuss split-dollar life insurance basics: what is it, and what are its benefits?
What is Split-Dollar Life Insurance?
Simply put, a split-dollar life insurance arrangement is a form of executive compensation, involving an agreement between employer and employee, who ‘split’ the benefits and ownership rights of a life insurance policy.
The employer and employee may share:
- The premium cost
- Cash value, and
- Death benefits of a permanent life insurance policy
Additionally, the employer and employee may determine the following:
- How long the plan will remain in effect
- Expectations on what each party hopes to accomplish, and
- When or how the plan will be terminated
Types of Split-Dollar Insurance Plans
There are two types of split-dollar life insurance plans.
- CASCollateral assignment split-dollar (CASD), and
- Endorsement split-dollar
Benefits of Collateral Assignment Split-Dollar (CASD) Life Insurance Plans
Executive retirement plans are a great way to recruit and retain top talent. They can provide long-term benefits to credit union executives beyond salaries and bonuses, including additional life insurance and cash payout.
Additional benefits of CASD plans include:
- The sponsoring credit union booking income on the loan made to the executive
- Potential tax-deferred/tax-free treatment of retirement benefits for the executive
- Recovery by the credit union of the capital used to fund the plan
- Avoidance of corporate excise tax
Lastly, another advantage of split-dollar life insurance is that it can be used to provide financial security for loved ones in the event of the policy holder’s death. This form of executive compensation can also be used as a way to transfer wealth between generations.
Disadvantages of Split-Dollar Life Insurance
There are some disadvantages to split-dollar life insurance. One is that the policyholder may have to pay taxes on the death benefit if the beneficiary is not a family member. Another is that the policyholder may have to keep up with premium payments even if the beneficiary stops making contributions.
No two policies are the same, so it’s important to speak with an insurance professional about your specific plan.
Acumen Financial Advantage is Here to Help!
At the end of the day, split-dollar life insurance is a personal decision. There are pros and cons to consider, but it can be a useful tool for financial planning.
Interested in learning more about how your organization might implement a split-dollar compensation plan? Reach out to our team at Acumen Insurance Solutions today. Then, read on to learn how to retain top talent using executive compensation.