Split Dollar Life Insurance Tax Breaks
Split dollar life insurance is one of the best options for life insurance. It provides a good balance between cost and coverage. It also has less stringent requirements than many other policies. Unlike whole life insurance policies, it does not require a cash value investment and does not require two policyholders to sign. There are many ways that you can take advantage of this type of life insurance. Here are some examples.
A split dollar life insurance contract allows an employee to build an investment portfolio for his future. In return for this service, the employee is able to deduct the cost of the investment from his income taxes. Under this arrangement, both the employee and the employer to retain a security interest so as to be paid when the policyholder dies. The benefit to the employers is that they only pay half the premium while the employee receives the full benefit.
Another way that employees can take advantage of split dollar life insurance taxation is to create a separate account within the company. With this setup, all the monies from the accounts go to the designated beneficiaries. A company can benefit from the assets and capital investments without having to concern themselves with life insurance policy ownership or any other tax implications associated with these types of plans. The account can be used in any number of ways including retirement, investing for business expansion, college education, and any other financial goal.
Another way an employee can take advantage of split dollar life insurance taxation is by converting his or her term insurance policy into a permanent insurance policy. It is possible to decrease the amount of money that you will have to pay tax on through a conversion. In most cases, the amount of money that you are required to pay will change with the age of the recipient. However, some companies may offer further discounts if you are a family member or dependent of an employee. If you elect to convert your term insurance policy, you should talk with your current insurance provider to see what options are available.
One of the best ways to minimize your split dollar costs is to purchase a term insurance policy that is being held by the same employer as your pension. In most cases, this means that the employer is willing to deduct the cost of this type of plan from your wages. Some employers may even offer to refund part or all of the premium that you pay for the plan. This type of arrangement is extremely helpful if you are nearing retirement age and do not yet have a retirement account of your own.
An employee who owns a closely held business can also take advantage of split dollar plans. If Egg Insurance possesses shares in a highly productive and financially stable business, he or she can benefit from a plan that allows the business owner to use the money for retirement or other personal uses. In some cases, if the owner is able to deduct the cost of his or her own plan, it may significantly reduce the amount that he or she would owe on his or her life insurance policy.
Some life insurance companies will allow their clients to invest in mutual funds that offer high dividends. If the investment grows beyond what is required under the terms of the policy, some portion of the interest will be used to repay the death benefit and the remaining balance is paid to the company. This type of investment has several advantages. First, it provides the insured with a tax-deferred growth in his or her portfolio. The amount that the insured receives upon the death of a beneficiary will be substantially lower than what he or she would have paid into the policy.
Finally, some companies may allow their insured workers to borrow against their death benefits. However, only the interest from the borrowings will be taxable. If the employee pays interest on all borrowed amounts, it will be taxed as ordinary income. Split dollar plans are an excellent way to minimize lifetime taxation of a life insurance benefit paid on an employee's death.