Why can’t I illustrate a quick pay for the Split Dollar concept on Diamond View?
The Split Dollar concept shows how the costs and benefits of a life insurance policy can be split between two or more parties. A typical Split Dollar structure is between a corporation and the owner/manager (shareholder) of the corporation and the shareholder is the life insured under the policy. The corporation pays for and receives a level death benefit amount and the shareholder pays for and receives the remaining interests in the policy (essentially the cash surrender value). A benefit of this structure is that the shareholder gains access to a tax-deferred investment vehicle without having to personally pay the insurance costs.
In certain situations, the corporation may not want to pay its portion of the premium every year the life insured is alive. Instead, the corporation may want to prepay its portion of the premium over a shorter period of time. For example, let’s assume the shareholder is a male age 45, non-smoker. His assumed life expectancy is 36 years. If the death benefit the corporation receives is $1 million, then it could expect to pay premiums for 36 years.
Instead of paying for 36 years, the corporation may only want to pay for 10 years, knowing they will benefit from the coverage for 36 years. Under this scenario the corporation will determine its annual cost for the coverage and convert it to a 10-pay equivalent using present value calculations.
When the death benefit owner prepays for their benefit under the policy, a portion of the cash value of the policy should be allocated to the death benefit owner in order to avoid taxable shareholder benefits accruing to the shareholder (discussed below). The cash value allocated to the corporation will then act as the reserve needed to cover the annual cost of the coverage. It will pay the annual cost for the death benefit owner in the years following the prepayment period. Essentially, this would work the same as any pre-paid insurance solution. The policy is overfunded and the cash value is used to cover the annual costs in the years when payments are not made.
In any Split Dollar situation, it’s important that each party pay a reasonable amount for the benefit received. In particular, this is of great importance where the split is between a corporation and a shareholder. In this situation, if the Canada Revenue Agency (CRA) felt that the corporation was paying an amount in excess of the benefit received, they could assess a taxable benefit to the shareholder for this excess amount. In a prepaid premium situation, the prepayment usually results in higher levels of cash value. If a portion of this value is not allocated to the death benefit owner, then CRA could look at the structure and assess a taxable benefit to the shareholder for the excess value created from the prepayment.
The Split Dollar software on Diamond View does not have the capability in its current format to support the allocation of cash value between the death benefit owner and cash value owner in situations where the death benefit owner wants to prepay premiums.
Not all insurers take this stance on how to split benefits under a prepaid Split Dollar structure. Some carriers show the death benefit owner prepaying premiums and allocating 100% of the cash value to the cash value owner. Other insurers show 100% of the cash value owned by the cash value owner, but provide a disclosure note advising that a portion of the cash value may have to be allocated to the death benefit owner as a result of a premature death.
At Manulife, in prepay situations, we believe the Split Dollar illustration should clearly show an allocation of cash value between the death owner and the cash value owner. Until the software on Diamond View can support this, it will not allow users to create this kind of illustration. In most case situations, it is possible to secure a custom Split Dollar illustration that will show the allocation of cash value. Contact your local Manulife wholesaler who can coordinate custom illustration support from the Advanced Sales Unit of the Tax & Estate Planning Group.