Problem: How are split-dollar life insurance arrangements treated under tax law?

        Strategy: It depends on the arrangement.

        According to the Financial Planning Association, the rules are different if the arrangement is an “equity split dollar,” which has been gaining popularity.

        A traditional split-dollar arrangement involves the employee buying a permanent life insurance policy and the employer paying for that part of the premium equal to that year's increase in the cash surrender value. The benefit might be partly taxable to the employee if he pays less than what the premium for an equivalent term policy would be.

        The employer can't deduct its premium payments, but the eventual repayment of its total premiums out of cash surrender value when the employee leaves service or retires is tax-free. This allows the executive to hold high-value life insurance for minimum cost.

        In equity split-dollar arrangements, life insurance with a high investment component is bought. The employer may pay the bulk of the premiums, but is repaid out of the cash value at the insured's termination, retirement or death only the total amount of premiums paid by the employer. The remaining cash value goes to the employee and the death benefits to the beneficiary. In short, the executive has received an interest-free loan from the employer and garnered potentially substantial investment gains.

        Regardless of whether a policy is owned by the employer or the employee, the investment gains in an equity split-dollar arrangement beyond the actual life insurance protection are taxable. When that gain is taxed will depend on the arrangement.

        Readers: Consider Savvy Strategies as general information only and seek the help of professionals because circumstances vary.

        Planners: Share your unique tips with Enquirer readers. Send your Savvy Strategies to Amy Higgins, 312 Elm St., Cincinnati 45202 or e-mail ahiggins@enquirer.com.

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