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. | Split Dollar Coverage
Permanent life insurance policies have tax-deferral advantages that make them very attractive to high income executives. However, they may not personally feel the need for insurance. Businesses, on the other hand, often want key person coverage on these individuals but do not want the expense of paying for a cash value life insurance policy.
Split dollar life insurance can be an ideal solution. The business and the executive jointly purchase a life insurance policy on the executive. The business is the owner and beneficiary of a level amount of death benefit coverage and the executive is the owner and beneficiary of the cash value of the policy.
The business pays the cost of the insurance coverage and the executive makes contributions to the plan which accumulate on a tax-deferred basis. The executive owns the cash value portion and can use it as he/she likes, as long as there is enough value to keep the plan going. At retirement, the executive can use the plan to supplement retirement income or fund major expenses such as vacations or unexpected health care costs. If funds are withdrawn from the plan, they will be partially, if not entirely, taxable. The balance continues to enjoy tax deferral. If the executive dies, the company receives a tax-free death benefit equal to the face amount of the policy and the executive's heirs receive a tax-free death benefit equal to the plan's cash value.
Similarly, a split dollar plan could be used with the roles reversed. The executive would pay for a level amount of insurance while the business builds up a pool of cash value. If the executive dies, his/her heirs receive a tax-free death benefit equal to the face amount of the policy and the company receives a tax-free death benefit equal to the plan's cash value.
For more information on the advantages of split dollar coverage, contact us for a Manulife Financial representative in your area.
Problems facing small business owners and professionals
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