The Executive Benefit Endorsement Split-Dollar Arrangement is an employer funded fringe benefit that is used to attract and retain key executives. It allows employers to offer certain key executives personal life insurance protection with minimal effect on current cash flow or inventory.
Setting up The Executive Benefit Endorsement Split-Dollar Arrangement
In the negotiation period the employer will enter into an agreement with the key executive with the help of legal counsel that clearly outlines the amount of cash value life insurance. Once the amount has been defined it is important that all parties understand how this works so no one is surprised once the policy goes into effect. Please review with your legal counsel before signing any paperwork.
- The employer purchases and owns a cash value life insurance policy on the life of the key executive and will pay the nondeductible policy premiums.
- The employer will endorse to the executive the right to name the beneficiaries for a specified amount of the death benefit proceeds. Every year the employer will report the economic benefit value of the death benefit endorsement as taxable compensation to the executive.
- If the executive passes away, the employer generally receives a portion of the income tax-free death benefit normally equal to the greater amount; the policy’s cash value or the amount the company paid in premiums.
- The executive was able to name the beneficiaries so they will receive the generally income tax-free balance of the death benefit.
Why Use Life Insurance to Fund the Executive Benefit Endorsement Split-Dollar Arrangement
As with most of these types of arrangements, using a life insurance policy to fund them takes the burden off the employer to come up with other means to bonus the key executive. The executive benefit endorsement split-dollar arrangement allows the executive to control a portion of the death benefit of the cash value life insurance policy to protect his family and/or estate in case of an untimely death. Of course the executive will need to consult his accountant to make sure this type of arrangement is best for his situation before agreeing to this kind of compensation. The company should also check with their legal counsel to ensure the arrangement is in their best interest as well.
Disadvantages of using life insurance to Fund The Executive Benefit Endorsement Split-Dollar Arrangement
There are always disadvantages that need to be taken into consideration when considering any type of compensation agreement that is funded all or partially by life insurance. Always go over the pluses and minuses of the arrangement with your attorney and accountant before agreeing to such an arrangement. Remember, you do not own the policy so you will need to be clear as to what happens if you and the company decide to part ways. Make sure you discuss any other features and benefits for you when considering this arrangement.
Check out a non-qualified-supplemental-executive-retirement-plan if you are looking for a way to give certain executives additional non-qualified retirement options. It’s just another way Business Life Insurance can work for you and your company. Just don’t forget to read through all the Nashville Life Insurance resources for additional information.