BUSINESS-RELATED LIFE INSURANCE: THINGS TO CONSIDER
Business owners must often choose the right ownership and payment structure for the business-related life insurance coverage. In selected cases, fairly sophisticated strategies—such as financed premium, pension-owned coverage or 412 (e)(3) plans—can fit a client’s needs.
However, most instances of business-related permanent life coverage involve choosing between three nonqualified life insurance plans:
- Bonus plan
- Split dollar plan
- Key employee insurance plan
What are these, and which one is the best choice?
Under a bonus plan, the employer and the selected employee enter into an agreement under which the employer will pay the employee extra to cover the premium for a life insurance plan. The employer has the ability to pick and choose who among the employee group will be part of the plan.
A bonus plan generates a tax deduction for the business. However, the business gives up control of the coverage, and the employee must report the bonus amount as taxable income.
Under a split dollar plan, the employer and employer enter into an agreement regarding how the premium and policy benefits will be split. One simple method of splitting involves having the employer own the policy’s cash value, and the employee controls the policy’s death benefit in excess of the cash value.
While a split dollar plan does not generate an income tax deduction for the business, it does allow the business to recover some or all of the costs of the plan. Split dollar can also be beneficial for the employee, in that it usually has a lower out-of-pocket cost than buying personal coverage.
Under a key employee insurance plan, the employer owns insurance on the life of an employee. The employer is beneficiary of the policy and pays the non-deductible premium.
Key employee insurance on a non-owner employee makes sense where the business owner wants to keep control of the life insurance policy for business reasons. In some cases, key employee insurance also makes sense for the business owner for cash flow or other business reasons.
Bonus plans, split dollar plans and key employee life insurance plans are the most usual ways for closely held business owners to pay for needed life insurance. For business owners, the decision regarding which plan to choose is driven primarily by cash flow, control, and tax considerations.
For non-owner employees, the employer is usually the decision-maker regarding how to fund the life insurance policy. Deciding on the proper plan requires weighing the relative importance of deductibility, control of the policy, cost recovery, simplicity and the needs of the employee.
I hope this information is helpful.
Please contact the Law Offices of William H. Copperthwaite Jr., L.L.C. if you have any questions.
Please note that the information contained in this summary is intended for informational purposes only and is not to be considered tax/legal advice. For specific advice, please contact the Law Offices of William H. Copperthwaite Jr., L.L.C.
