10/27/2004 SPLIT DOLLAR INSURANCE Split Dollar Insurance, or as it is now sometimes called, Shared This article is provided as a Ownership Insurance is first and foremost, not a reason to buy service to Leoganda clients insurance. for information purposes only. Reproduced with permission from the original publisher, It is a method of arranging that the benefits and costs of a life HUB Financial. insurance policy are formally allocated between 2 or more parties. The idea of Split Dollar is to recognize that there are two primary components of a Life Insurance Contract: • The Death Benefit • The Cash Value (savings element) These separate interests can be matched to the parties that most require the benefits provided by these elements. Therefore, if one party such as a corporation needs low cost insurance on a person for, say, key person coverage while another party, often the insured person would like to take advantage of a tax sheltered savings program, this structure will provide for both. Reasonableness The Canada Customs and Revenue Agency (CCRA) has made the following statements about Split Dollar which must be taken into account when segmenting payments: "It is our view that the benefit to be included in an employee/shareholder/s income is the amount by which the premium cost for the equivalent term coverage exceeds the premium paid, if any, by the employee/shareholder under the policy" 1992 CALU AGM The question of a reasonable allocation of costs can be dealt with in several ways: • Market Approach: equivalent term coverage for a specified term eg: 5yr,10yr,T-100 • Cost within the Policy: mortality cost used in the plan eg: Level Page 2 COI • Net Cost of Pure Insurance: this costing is recognized by the Income Tax Act as an approximation of the cost of insurance. Structures The Death Benefit owner may have an interest in the death of the insured for their lifetime or, it may be that they only need coverage for a short period of time, say to retirement at Age 65. Therefore, the Death Benefit owner, possibly the company, could, if they had a lifetime interest in the insurance, pay the level COI cost. Alternatively, should they have a short term interest in the insurance, only pay 10 year term costs to Age 64. At that time, the company may wish to dispose of the insurance and it would be in the cash value owner (probably the insured person) to have the insurance transferred to them at that time. This is "arguably" not a taxable event since the insurance portion of the contract has no cash value. However, if at the time of the transfer, the insured person is not well, or uninsurable, CCRA could argue that a benefit has been conferred on the transferee equal to the face amount of the plan. Other premium deposit structures are possible using calculations such as the Net Present Value of the Net Cost of Pure Insurance to the death benefit owner. This would be useful in Quick Pay illustrations where the Death Benefit owner wants to make payments for a short period of time. It is also beneficial to the cash value owner as the higher deposits resulting to the death benefit owner lower the deposits by the cash value owner. Split Dollar Agreements It is vital to document Split Dollar arrangements. The paperwork provided to companies in Split Dollar simply informs them that there are multiple owners and beneficiaries, it does not explain who owns which part of the contract and how much is to be paid to each party. This can be fully documented in a Split Dollar Agreement which is a Page 3 legally enforceable contract specifying the rights and obligations of each party.