Life insurance’s versatility makes it an excellent choice for meeting a dual need experienced by many small businesses. It’s common for one party within a business to need the financial protection that life insurance provides against death, either theirs or someone else’s within the company, while another person needs a tax-sheltered investment vehicle.
One life insurance policy can provide for the needs of both parties by using an arrangement commonly referred to as “split dollar life insurance”. In these arrangements, one party typically owns and pays for a level death benefit portion of the policy and the other party owns and funds the remaining interests in the policy (generally the cash value).
In the business context, a split dollar arrangement can be used in a number of different ways. For example, an employer may need key person insurance on an executive and the executive might want a tax-sheltered investment. The employer and the executive could enter into a split dollar arrangement where the employer pays for and owns a level death benefit on the life of the executive and the executive pays for and owns the cash surrender value component of the policy. The beneficiary of the level death benefit is the employer, while the beneficiary of the cash value is designated by the executive (his or her spouse, for example).
Contact us today to learn more about split dollar arrangements.
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