Premium Financed Corporate Split Dollar: Two Strategies, One Great Outcome

Corporate Split Dollar Life Insurance is not a new financial strategy. Premium Financed Life Insurance is also not a new financial strategy.  When the two advanced strategies are combined, they can become a powerful tool for a business to reward and retain key employees.  Let’s dig in to learn more about the advantages of these two life insurance tools.

What is Corporate Split Dollar Life Insurance?

As the name implies most Corporate Split Dollar Life Insurance transactions are used in a business setting between an employer and employee.  By using this strategy the cost of the life insurance and the benefits offered through the policy can be shared by the employer and employee.  The life insurance policy should be a permanent policy that accumulates cash surrender value.

The Corporate Split Dollar is not the life insurance policy itself; it is a contract between the employer and the employee.  This contract outlines the following:

  • How the premium costs of the life insurance policy will be shared.
  • How the cash surrender value of the insurance policy will be shared.
  • How the death benefit of the insurance policy will be shared.
  • How long the contract will be in effect.
  • How the contract will be terminated.

This arrangement can be used to provide additional compensation or retirement benefits for employees, as well as providing tax advantages for both.  Corporate Split Dollar contracts are legal documents and should involve an attorney or tax advisor during the creation of the documents.

Defining Life Insurance Premium Financing

With premium financing, a person and/or entity purchases a life insurance policy through a life insurance carrier and obtains a loan from a lender in order to pay the premiums on the policy.  In order to secure the loan, collateral is required.  In most cases, the cash value of the life insurance policy can partially collateralize the premium loan.  As with most loans, the lender charges interest.  With premium financing, a borrower may be responsible for paying this interest to the lender.  The loan will be repaid to the lender on terms agreed to by the business or from the cash benefit of the insurance policy itself.  

The Combo: Stronger Together

premium financed life insurance pic of person studying dataWhen you combine Corporate Split Dollar and Premium Financing the employer (or a created Irrevocable Life Insurance Trust (ILIT)) owns the life insurance policy and borrows money from the Lender to pay the insurance premiums.  The lender places a collateral assignment over the policy for the duration of the loan terms.  This allows the employer to retain capital that can be used in other parts of the business while also giving them the ability to retain or attract top talent.

The employee makes annual interest payments to the premium financed loan.  The benefits for the employee are life insurance coverage and the advantages the policy provides, including the cash surrender value and the death benefit.

Both Corporate Split Dollar Contracts and Premium Financing arrangements are powerful tools, but if the appropriate professionals are involved the agreements can prove to be lucrative for both employers and employees.

Insurative Premium Finance Massachusetts, Inc. can assist in navigating these agreements.  Contact us at 877-281-1311 or info@insurativeus.com