Split-dollar life insurance is a unique type of life insurance policy that can be extremely beneficial for businesses, including nonprofits and credit unions, and their key employees. Unlike other types of life insurance policies, split-dollar allows the organization to share in the risk and rewards associated with the policy.
A split-dollar life insurance arrangement is an executive compensation tool that involves an agreement between employer and employee to ‘split’ the benefits and ownership rights of a life insurance policy.
This type of arrangement can provide significant advantages for both the employer and the employee, making it a popular choice for many types of organizations. In this blog post, we will learn more about split-dollar life insurance and why it is so important for businesses.
For a more in-depth explanation of split-dollar life insurance, read our post, What is Split Dollar Insurance?
Listen and Learn
Hear what Acumen’s very own Scott B. Hinkle has to share about split-dollar life insurance. Scott is the leader of the firm’s Credit Union practice and brings over twenty-five years of experience in the financial services arena.
Firstly, Scott mentions that, “-it’s very important for the institutional consumer to understand with a very high level of clarity what they’re getting themselves into when they do choose a partner as it relates to a split dollar transaction.”
The key points he goes on to discuss are:
- The Importance of Understanding Split-Dollar Transactions
- What to Consider When Choosing a Partner
- Exit Strategies
- Repayment of Outstanding Loan Balance
- Control Over the Retirement Vehicle
- Benefits of Policy Performance
- Design Considerations for Executives
- The Decision Making Process
Split-dollar is a type of life insurance arrangement in which the death benefit is split between the policyholder and the beneficiary. The policyholder pays the premiums, but the beneficiary receives the death benefit. This can be important for executives who want to have control over their retirement benefits. It is important to understand how the policy may perform before choosing this type of life insurance.
Scott wants clients to consider some important questions regarding their split-dollar policy. These include:
- What is the exit strategy?
- Do we have to wait around until the executive dies?
- Can there be a mechanism by which repayment of that outstanding loan balance is addressed during the life of the executive?
- Who has control over the retirement vehicle?
If you’re the executive,
- Do you know if you have 100% control over distributions from the policy?
- Or do you have to go back to your former employer and work with them to do something different, to take money out and at what speed?
- What if the policy outperforms original projections?
- Who benefits? Does the executive benefit? Does the organization benefit?
- Or does effectively nobody benefit because nobody can take it out or use it in a different fashion than originally contemplated?
Historically many of these policies have outperformed projections and Scott believes that, “-if the policy can afford a larger benefit payout, it should provide a larger benefit payout to that executive”.
Key Takeaways from Scott
It’s important for clients to understand what they’re getting themselves into when they choose a partner for a split-dollar transaction. Some of the questions that are important for clients are about the exit strategy, control over the retirement vehicle, and whether the policy is performing as expected. Most executives just want to be in control of their retirement plan and not have anyone telling them what to do. It’s important for consumers to understand what they’re getting into and some of the design considerations that could be implemented.
Today, especially for credit unions, it’s important to understand these types of executive compensation arrangements.
Split-dollar life insurance arrangements can be complex and difficult to understand. This is why we’re here—at Acumen Insurance Solutions—to explain this form of executive compensation further. Reach out to us today!