Co-Founder, TermInsuranceBrokers.com, Goldenzweig Financial Group, Las Vegas, Nevada
I believe what you are referring to is what's called "split-dollar" life insurance. This type of life insurance is generally used for businesses to help an employee purchase coverage - it can be used as a form of deferred compensation or as an incentive for the employee to work at that company.
The idea of a split-dollar policy is to share or "split" aspects of the program between two parties (again - generally employer and employee), including ownership, premiums, death benefits, cash value, and dividends.
The advantages for the employee in doing this type of policy is to get the coverage they need to protect their family, but at a cheaper price. When the employer is paying premiums, the employee may be able to reduce their income tax liability when in higher tax brackets. Upon the death of the employee, the proceeds can be used to provide for estate liquidity.
So why would the employer do all of this rather than make the employee buy an individual policy on their own? In short, tax purposes. While it allows the employer to provide benefits to their employee with low costs, the portion of premiums the employer pays can be deducted for tax purposes. Upon the death of the employee, the employer is paid an amount equal to the sum of premiums paid on behalf of the deceased employee. These plans feature a good amount of flexibility for the employer as well, as they can modify or terminate the program at their discretion.
In Canada, Split Dollar Insurance is usually referred to as Shared Interest Insurance.
The Shared Interest concept is an effective strategy for sharing life insurance costs and benefits.There are a number of family and business scenarios where this concept can be applied. To illustrate, I will outline a business situation as an example.
Under the shared interest concept, the death benefit, premiums and cash values of a permanent insurance policy are apportioned between company and the key employee or shareholder, who pay for their separate interests under the policy.
With the Company responsible for the life insurance portion of the premium, it receives:
- Tax free buffer fund to cushion the shock of death of key person (protect profits)
- Funds to redeem shares for a buy-sell &/or succession plan
- Life insurance death benefit creates a tax free capital dividend that can be paid out to surviving shareholders.
With the business owner or key person responsible for the cash value portion of premium, he/she receives:
- Tax advantaged accumulation without paying mortality costs
- Access to cash value for living benefits (policy loans, withdrawals,collateral)
- Increased retirement resources.
Setting up the Shared Interest concept is complex. There are many issues to consider in addition to what is outlined here. Therefore, it is recommended you seek your own independent professional advice from your lawyer and/or accountant.
Note: The Canada Revenue Agency's (CRA) position is that each party in the shared interest agreement must pay a reasonable amount of the premium for the benefit the party receives. In a non-arm's length situation, a taxable benefit may be considered to be conferred on one of the parties to the agreement unless all parties pay a cost equal to the fair market value of the benefit received.
If you have further questions, or feel that I could be of assistance, please do not hesitate to contact me.
If you would like to work with a local life insurance broker, you could start with a Google search. For example, if you search for: life insurance broker Halifax or life insurance agent Halifax, my name, along with several others, will come up. You can use the same method to find a life insurance broker in your community.
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The idea of a split-dollar policy is to share or "split" aspects of the program between two parties (again - generally employer and employee), including ownership, premiums, death benefits, cash value, and dividends.
The advantages for the employee in doing this type of policy is to get the coverage they need to protect their family, but at a cheaper price. When the employer is paying premiums, the employee may be able to reduce their income tax liability when in higher tax brackets. Upon the death of the employee, the proceeds can be used to provide for estate liquidity.
So why would the employer do all of this rather than make the employee buy an individual policy on their own? In short, tax purposes. While it allows the employer to provide benefits to their employee with low costs, the portion of premiums the employer pays can be deducted for tax purposes. Upon the death of the employee, the employer is paid an amount equal to the sum of premiums paid on behalf of the deceased employee. These plans feature a good amount of flexibility for the employer as well, as they can modify or terminate the program at their discretion.
The Shared Interest concept is an effective strategy for sharing life insurance costs and benefits.There are a number of family and business scenarios where this concept can be applied. To illustrate, I will outline a business situation as an example.
Under the shared interest concept, the death benefit, premiums and cash values of a permanent insurance policy are apportioned between company and the key employee or shareholder, who pay for their separate interests under the policy.
With the Company responsible for the life insurance portion of the premium, it receives:
- Tax free buffer fund to cushion the shock of death of key person (protect profits)
- Funds to redeem shares for a buy-sell &/or succession plan
- Life insurance death benefit creates a tax free capital dividend that can be paid out to surviving shareholders.
With the business owner or key person responsible for the cash value portion of premium, he/she receives:
- Tax advantaged accumulation without paying mortality costs
- Access to cash value for living benefits (policy loans, withdrawals,collateral)
- Increased retirement resources.
Setting up the Shared Interest concept is complex. There are many issues to consider in addition to what is outlined here. Therefore, it is recommended you seek your own independent professional advice from your lawyer and/or accountant.
Note: The Canada Revenue Agency's (CRA) position is that each party in the shared interest agreement must pay a reasonable amount of the premium for the benefit the party receives. In a non-arm's length situation, a taxable benefit may be considered to be conferred on one of the parties to the agreement unless all parties pay a cost equal to the fair market value of the benefit received.
If you have further questions, or feel that I could be of assistance, please do not hesitate to contact me.
If you would like to work with a local life insurance broker, you could start with a Google search. For example, if you search for: life insurance broker Halifax or life insurance agent Halifax, my name, along with several others, will come up. You can use the same method to find a life insurance broker in your community.