An explanation of “split-dollar” life insurance premium and death benefit arrangements between credit unions and executives.
The term “split-dollar” refers to an arrangement between an employer and employee to split the premium, ownership rights and/or death benefits for a life insurance policy on the employee.
A typical split-dollar arrangement is when a credit union and its executive split the death benefit and the cash value of a permanent (or “whole”) life insurance policy. The credit union pays the full cost of the premium in the form of a loan to the executive, and the executive owns the policy.
In return, the executive assigns a portion of the policy’s death benefit back to the credit union to repay the loan.
This is called a “collateral assignment” (or a “split-dollar loan regime”) because the executive is using the policy’s death benefit and cash value as collateral for the loaned premium dollars.
The death benefit should be high enough to repay the loan to the credit union when the executive dies, plus deliver a substantial amount to the executive’s personal beneficiaries.
The agreement can also be structured so that when the executive retires, a second benefit kicks in that provides the executive with the funds to repay the loaned premium dollars to the credit union. Then, when the executive dies, the death benefit will be paid to his or her designated beneficiaries.
The premiums paid by the credit union can be calculated to be high enough to generate enough projected cash value for executives to use in supplementing their retirement income.
The details of split-dollar arrangements should be spelled out in a contract that implements the agreements. It’s critical for credit unions to work with experienced legal counsel on these agreements and stay current on how the policies’ underlying investments are performing.
John Pesh is director of executive benefits for CUESolutions provider CUNA Mutual Group, Madison, Wis. Reach him at email@example.com. For more information about becoming a CUESolutions provider, please email firstname.lastname@example.org.
Apply it to your Board Room:
- Does your credit union provide “split-dollar” life insurance to executives? If not, what type of life insurance benefit is provided?
- Does your board know how the life insurance policies’ underlying investments are currently performing?