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“I m jamie hopkins. And i m joined here with steve parrish thanks for joining joining my pleasure and i want to talk to you about a planning technique with insurance. We call split dollar life insurance and i know a lot of our students are familiar with this they use it the advisors. Out there it is not that you know an unheard of thing.
But for some of our students. They might not be that familiar with it if they didn t come from the insurance side or business planning side and and you just give us a little background. What do we mean by split dollar life insurance well. It comes from the the term split dollar.
Meaning. Somebody has a need and somebody else has the ability to pay for words. And that s where that term came from and really the healthy in days of split dollar before 2003. It was used a lot for retirement planning death benefit planning estate planning.
And what happened is the irs. Said. It s being used a little too much and so they they said wait a minute and so some regulations came out in 2003. And quite frankly what dollar went to sleep for several years.
It s now coming back. And it s coming back in a major way. And what it s mainly been used for in less decade. If you will k is as a very efficient way to primarily to provide a death benefit to people who need more life insurance and they can just get from group term or something like that and it was popular and is popular using a technique called endorsement method where essentially the employer owns.
The policy they have the ability to pay they pay the premium and they endorse the death benefit off to the employee who names his or her beneficiary right the advantage of it is really twofold for the employer. The advantage is that they re still controlling the policy and they re going to get their money back whatever the premium right so they like that you know possessions. 90 of the law for the employee. The advantage is they get this death benefit.
But they get it for very low tax cost essentially their pain just just the tax cost on what would be the term cost of the insurance right so it works very well as a way to provide a very efficient death benefit. Yeah..
It s been use the last 10 years. A lot yeah. And that s it that s a that s a great point right because it it s just that efficiency of it as long as the employer is willing to do this right. It s very efficient for the employee because they re not paying the whole premium to get the death benefit they re actually kind of paying less and there s a lot of different ways.
Though as he said that they re structured. So the employer can get back money right. It s whether they get the cash value back or you know how they structure it so the premiums. But it they can structure that in a variety of ways is that correct right and typically the employer pays the whole premium.
There are some ways you can split the split dollar. But normally the the employer pays it what i ve seen though is the interesting trend last few years is retirement planning become a bigger issue is okay i have this policy. Which would be a cash value policy. But what happens if i have the good fortune of not dying there in my workers and so it s been kind of exciting to see that there has been progress on that actually for a different reason.
In that deferred compensation has been a very popular way to take care of your more affluent employees. But at a similar time along comes another set of rules 409a on the deferred cut makes a little more complicated. And so what people started to realize is maybe we can mix the two and so what they re doing is they have this endorsement split dollar. So i m you know if you die too.
Soon your family is going to be taking a fa yeah. But we have this cash value so what we could do as a separate agreement is if you do make it to retirement or to a designated age maybe 15 years or whatever what we ll do is actually pay you a lump sum of money the lump sum of money can coincidentally is going to be the the cash value or at least the value of the policy. We ll distribute this policy and it s kind of nice for a number of reasons again looking at the employer. It s a golden hancock.
They re saying hey. If you stay with me for 15 year you re going to get this great policy. If you don t you know the death benefit goes away and you go away. If you make it here s this policy.
A second advantage is the employer gets deducted. Okay and here s the policy they get to deduct whatever that cash value whatever the value of the policy is to the employee..
The advantage is if i die too soon at least. My widow or widower will be taken care of on a tax free death benefit if i make it the 15 years or to retirement. I m going to get this it s even better than money because when you get money you got money. But here i get this policy.
I could cash it in but maybe i m uninsurable i couldn t eyes it i can take withdrawals the life insurance. So it s become an attractive way as long as you realize those are two different things. A death benefit agreement. During your working years and the possibility of getting this lump sum distribution.
Which is really form of deferred comp right. But they re using the policy to pay it yeah. So that s interesting because then they have a lot of different ways they constructor. This thing right and so do you still see a lot that where the split dollar agreement just ends.
When the employee e is done with the work they re right they work there for 15 years and they switch firms they retire whatever they re gone. What typically happens to the the policy s end. You is a death benefit. If it permanently endorsed.
You do they have to keep paying the premium. You know what what happens. There a few things sometimes split dollar is used as a combination of an employee or executive benefit and is key person insurance. Okay.
So the employer will essentially say well i have this policy. I m going to keep this policy. Okay and so sometimes they ll even take the endorsement off after no bettors. But a pack of themselves exactly.
And so it s just key person insurance. The other is frankly life insurance tends to be a good cash management asset for a company and so i don t want to be morbid about it..
But what they may do is just wait till. The person s retired. It might be 85 years old do a social security sweep. And see that they died and collected tax free death.
Benefit and then the third one going to your other question is sometimes they say instead of a golden watch we re going to hand you this life insurance policy. So it s not really deferred comp. It s just a one time bonus of the policy. We get done okay and i guess for from the employee side you probably want to know that right because if you re paying taxes on this overtime.
And you know you don t plan on dying. There right then part of the decision is do i want to pay taxes on something that i might never get a benefit from if i don t think i need the insurance coverage on it because obviously you are getting a benefit you re getting the term coverage while you re working there. But if you re kind of thinking long term retirement planning maybe i want to know about what happens. When i retire with this policy and you can do that that s where the deferred comp idea kind of happens you what you do is you set up a non qualified deferred comp agreement.
And so that says 15 years this will vest and and i want to point out that the way i like to see it at least is that you really do it in a lump sum. Because that way you don t have to go through all the hoops that you have to go through normally with the furred compensation. You kind of set up an agreement and as long as you pay it out as a lump sum. You don t have all the heavy duty restrictions.
That usually make deferred comp more usable with big companies. Okay. So yes you can know in advance. When you re going to get that policy all right and are you seeing any changes out there today just how people are using this what they re thinking about are they thinking about retirement planning or estate planning.
Keep business. What s the market today looking like for split dollar. Things are going on one is obviously as the baby boomers and even the gen xers are moving more towards retirement. They re starting to say i d rather bet for me than against me in other words.
I m going to live. So they re getting more interested in the idea of what happens at a cash value of the endorsement ponzi..
The other one is more recently collateral assignments. But dollars coming back it kind of went nowhere and that was where essentially the employer. I m the employer. The employee.
I m essentially lending you the money and essentially your the one that s paying for it and so you re paying me. What s taxable. There is a cuted imputed interest correct ray and that wasn t very big for a while because we all thought interest rates were going to go up how d that go. Yeah.
Interest rates are still very low. So collateral assignments split dollars becoming more interesting to people because they say well gee. I pay this little interest rate. I own the pie.
The executive on the policy and i m not going to die. I workout at the gym every day. I m going to eventually use those cash values right to use it as a retirement benefit and one other use is definitely in the buy sell world okay. So you and i are partners and i have a policy on you and you have a policy on me.
It s very common more and more common for the who has the checkbook is the company yeah the companies put dollars in it nothing fancy about it. But it s a very efficient way to pay for that very needed life insurance. The fund the buy sell agreement well i think those are great points about life life insurance and split dollar and how it fits into kind of the retirement planning deferred. Comp and even a little bit there about myself.
So thank you very much for joining us again. My pleasure. This video was made possible by the new york life center for retirement income. ” .
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