Maximizing the flexibility of Split Dollar Life Insurance to Create Maximum Financial and Tax Leverage

Growing up in the Panama Canal Zone, I always wondered how competitive Zonians might be with Stateside teams. We played all the popular American sports - football, baseball, basketball and track and field, et al. During those "Wonder Years", Panama had five world champion boxers and several Panamanian members of the world champion Pittsburgh Pirates (Manny Sanguillen and Rennie Stennett). Of course, Panama also had Rod Carew to offer, a Panamanian by way of New York City.

Several Canal Zone kids over the years made it into minor league system in the Pirates. Herb Raybourn, a longtime Zonian, and a major league baseball scout is well known for signing Mariano Rivera. He also signed some Zonians during his time in the Canal Zone. One of my brother's classmates and teammates, Jaime Cocanower, pitched Baylor to the NCAA Championship and then pitched five years for the Milwaukee Brewers. We played in several American Legion tournaments in the U.S. during the summers with the disadvantage of playing teams coming off an eighty-game season while we are playing our first few games of pre-season.

In youth football we played an all-star team from Miami every year. The team was coached by a former Zonian. We always fared well. One of my high school classmates, a white kid with flaming red hair, ran the 100-yard dash in 9.4 on a cinder track. In high school my brother kicked a 44-year field goal and I kicked a 41-yard field goal in the pouring rain in the 10th grade. I finished my last two years of high school at Culver Military Academy. At Culver I had the good fortune of sitting behind Jennifer Steinbrenner, the daughter of New York Yankee owner, George Steinbrenner, in Latin class. She was a top student and a genuinely nice person. It was also the height of the Billy Martin saga.

Thinking of the Yankees, it surprised me in my research that Mickey Mantle is considered the greatest switch hitter in the history of major league baseball. This article focuses on the planning power and potential of Switch Dollar Life Insurance, a planning concept that also not well known or appreciated. This article shows how an endorsement or collateral assignment Non-Equity Split Dollar can be converted into the Loan Regime Method of Split Dollar Life Insurance™.

A High-Level View of Split Dollar Life Insurance

The planning goal of a Split Dollar Arrangement is to provide a business owner or executive with a low-cost executive benefit. From the perspective of the business owner, cost can be measured in two ways, the financial and tax cost. The financial cost relates to the out-of-pocket premium expense and the tax cost to the business owner relates to the economic benefit as a result of the employer paying all or most of the policy premium. The business owner's tax cost is not measured by the amount of the premium paid by the employer, but rather the value of the economic benefit of the death protection payable to the business owner's beneficiary. The measurement of this economic benefit for tax purposes is the one-year term insurance cost for the death benefit allocated to the business owner under the Split Dollar Arrangement.

In the Economic Benefit Regime in either the Endorsement Method or the Collateral Assignment Method, the economic benefit cost to the executive is measured by the lesser of the insured's annual renewable term cost or the Table 2001 cost. Life insurers typically maintain a low cost annual renewable term policy on the books for this purpose. The rate increases as the insured ages. Eventually, it reaches a point where the business executive says "ouch." In the meanwhile, the employer owns the policy cash value and a death benefit equal to the cash value.

Once the policyholder reaches the point where the executive starts to feel the financial pain of the level of the economic benefit, it might become financially viable to use the Loan Regime Method of Split Dollar™ where the interest component remains the same rather than increase each year like the economic benefit regime because the cost of annual renewable term increases each year. Switch Dollar Life Insurance is a method of switching from the endorsement method or collateral assignment method to the loan regime method. With interest rates at a historic regime, this is a planning option that should be considered in every existing Split Dollar Arrangement or every new Split Dollar Arrangement being contemplated.

Overview of Switch Dollar Life Insurance

A “Switch Dollar” Plan allows a business owner who has an Economic Benefit Non-Equity Limited Collateral Assignment Split Dollar or Endorsement Split Dollar plan to switch to a Loan Regime Collateral Assignment Split Dollar™ plan at a time when it is more advantageous to have a Loan Regime plan instead of an Economic Benefit plan.