Collateral Assignment Split Dollar Life Insurance

In today’s competitive labor market, retaining and rewarding essential executives requires offering a strategic compensation and benefits package. Split Dollar Life Insurance can be a critical component in maintaining leadership continuity.

Collateral Assignment Split Dollar (CASD) plans are one type that have been included in credit union and non-profit executive compensation landscapes for decades, yet recently they have been gaining more popularity. It’s no surprise really; the flexibility of the product makes the benefit an extremely attractive addition to an executive’s total compensation package.

How does a Collateral Assignment Split Dollar plan work?

The beauty of the CASD is that there are a variety of ways to structure the agreement depending on the needs of the employer and employee. For the sake of simplicity, we’ll approach this description with some of the more common scenarios, knowing that there are various other options that can be implemented.

The CASD agreement is built upon the framework of a permanent life insurance policy with cash value such as a whole life policy and a premium payment annuity account.

The premium, cash value, and death benefit are three aspects of permanent life insurance that can be “split” or owned by more than one party. This enables financial professionals to provide customized solutions for clients’ needs.

The split-dollar arrangement allows the employee to own the policy and withdraw cash values as a benefit while the employer loans funds to the employee for payment of premiums. The employee retains ownership of the cash value, and the death benefit is directed to the employee’s beneficiary only after the employer has been repaid their loan principal and interest.

The policy and annuity are “collaterally assigned” as the backing for the investment and a “Split Dollar Agreement” governs the plan so the employer will recover the investment plus accrued interest on the loan.

There are several ways to design each plan type, structure the funding, and create the incentive.

Various advantages for the EMPLOYER

  • The employer establishes a strong executive incentive, retention, and recruitment program
  • Upon the executive’s death, the employer is repaid in full (loan principal plus accrued interest)
  • The employer has minimal administrative and reporting requirements

Various advantages for the EMPLOYEE

  • The employee has access to the policy cash value, after full vesting, with which they can supplement other retirement income
  • If the employee passes away prematurely, their beneficiary receives the death benefit remaining after repaying the employer
  • The death benefit may be accessible for qualified long-term care needs to support the executive

The “best” design combination depends on the needs, goals, and the desired impact of the parties involved.

Collateral Assignment Split Dollar Life Insurance can be an efficient and tax-advantaged method to reward and retain your top executives.

Retaining the best talent has always been a challenge and key to the success of an organization. Today, in such a competitive environment, companies are seeking to provide additional compensation to their best people to incentivize retention.

Incorporating a split-dollar insurance arrangement into your executive’s benefit package demonstrates your long-term commitment to your key employees.

To learn more, contact Stearns Financial at info@stearns.financial or 800.686.6916, or visit our website at www.stearns.financial.

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