We’ve all been in situations where something interesting caught our attention until it started getting complicated. It might be a really good idea, but the fog of the complexity quickly overwhelms the simplicity. At that point the interesting thing gets lost in the jungle and we walk away.
That’s a normal reaction. Sometimes, however, it’s not the best outcome.
“Split-Dollar” is a simple idea. The implementation is really complex. In the right situations, however, it’s also a fabulous solution. Let’s peel away the complexity for a moment and see if we can break it down to its simplest form, OK?
It’s often referred to as if it’s a product, “Split-Dollar Life Insurance”. In reality, there’s no such thing. Used correctly, “Split-Dollar” is one way to pay for a properly designed life insurance policy.
Split-Dollar works when the need for a policy is present, but the means to pay for it is somewhere else-so you “split” up the dollars in the policy to make it all work. In a recent case we worked on, it looked like this:
Problem
Fred Jr. would benefit from owning a permanent, cash value life insurance policy. At this stage of his life, however, what he can afford to do is rent the proper amount of term insurance.
Fred Sr. understands the advantages for his son and would like to help if it didn’t cost HIM to make this happen.
Solution
Split-Dollar!
Fred Jr. has the need; Fred Sr. has the means. Here’s how it worked so they both win;
Stratus searched out the best high cash value policy we could find for this situation. Then Fred Jr. applied for the policy, assigning its cash buildup back to his father in an amount equal to the premiums paid. His interest thus secured, Fred Sr. then paid the premium.
Outcome
Let’s highlight the key points that make this such a win on both sides of the deal;
Jr. wins. He gets to own permanent life insurance years earlier than he would otherwise have been able to do. He actually saves money because he no longer has to rent that term insurance going forward.
By making this happen, Fred Sr. helps his son get ahead, and, over time, it doesn’t cost him anything to do so. He’s merely transferring money from one asset of his to another asset of his-the cash value of the policy. The premiums he pays are neither a gift nor a loan. It doesn’t trigger any income tax. Any hit to his balance sheet is negligible-over a period of time the cash buildup will equal and then exceed the total premiums paid.
Here’s the disclaimer: behind the scenes, the mechanics of getting this right are complex. It was our job to lift up the hood and make sure all the pieces were in the right place. By doing that we made it easy for them both. When we closed the hood, all they had to do was turn the key and drive off smiling.
Here at Stratus, we help both individuals and other professional advisors. If you’re an individual, we help with clear, concise guidance you can trust. If you’re a professional advisor, we make that same standard of service available to you, helping you help your clients.
The insurance world can be difficult to navigate. Without a clear understanding of their current plan, it’s difficult to be certain that your clients have the right coverage. If you’d like to take a closer look, you’ve come to the right place. We can answer your life insurance questions and provide the clarity you need to sleep easy. To learn more about our services or join our newsletter today. To contact us, click here.
