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Boosting Executive Retention with Split-Dollar Life Insurance

Executives discussing split life insurance options

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In the competitive corporate landscape, attracting and retaining executive talent goes beyond offering a top salary. Today, savvy companies are looking toward more comprehensive compensation packages, where tools like Split-Dollar Life Insurance (SDLI) complement traditional 401(k) retirement plans. This strategy not only enhances the value of an executive’s compensation package but also signals a commitment to their long-term financial well-being and security.

As businesses continually evolve in their quest to attract and retain top-tier executive talent, innovative compensation strategies have become more important than ever. Let’s dive into why Split-Dollar Life Insurance in addition to traditional 401(k) plans is emerging as a key differentiator. 

What is Split-Dollar Life Insurance?

At its core, Split-Dollar Life Insurance (SDLI) is a contractual arrangement where a life insurance policy’s premiums, cash values, and death benefits are split between two parties, typically an employer and an employee. This collaborative approach offers several benefits, including lower out-of-pocket premium costs for the employee and the potential for a return of premium costs to the employer. It can include savings and investment components, balancing immediate financial security with long-term growth.

Key Features of Split-Dollar Life Insurance

  • Premium Sharing: Employers and employees share the cost of premiums in proportions agreed upon in the SDLI contract.
  • Death Benefit Allocation: The policy’s death benefit is often split to provide security to the employee’s beneficiaries while also potentially returning the premium cost to the employer.
  • Cash Value Accumulation: Certain types of SDLI policies accumulate cash value, which can be an additional retirement resource.

Why Should I Integrate SDLI with my Employees 401(k) Plan?

Enhancing Compensation Packages

While 401(k) plans are a cornerstone of retirement planning, offering predictable saving growth and tax advantages, SDLI adds a layer of personal security and potential wealth accumulation. This dual-structured approach ensures that executives have robust financial protection in place – an appealing factor for top-tier talent.

Comprehensive Financial Safety Net

401(k) plans offer steady savings growth, traditionally focused on post-retirement life.

SDLI introduces a layer of financial security effective immediately, covering life risks and potentially accumulating cash value. This blend assures executives not just of future security but also of current coverage for unexpected life events.

Attracting Top-Tier Talent

Enhanced packages with SDLI are often more enticing to sought-after executives, who value both long-term growth and immediate security. The combination signals a company’s commitment to comprehensive well-being, not just long-term financial planning.

Diverse Investment Opportunities

SDLI can include investment components, offering opportunities for wealth accumulation that are not tied to stock market performance, unlike 401(k)s. This provides an alternative investment stream, diversifying an executive’s financial portfolio.

Tailored Financial Planning

SDLI allows for customized planning based on individual executive needs and circumstances, providing a level of personalization that is highly valued by elite professionals. When paired with the long-term growth of a 401(k), SDLI can address a wider array of personal and family financial goals. Here’s what it offers executives:

Customization Based on Individual Needs

SDLI policies can be specifically tailored, taking into account the executive’s age, health, risk tolerance, and family commitments. This personalized approach means that each executive receives a uniquely structured benefit, that resonates with their specific financial situation and goals.

Wider Financial Goals Addressing

Beyond retirement, SDLI can cover goals like estate planning, children’s education, or creating a family legacy. It allows executives to secure large amounts of life insurance that can be used for various personal financial strategies.

Tax Advantages

SDLI arrangements can provide tax-efficient ways to receive benefits. For instance, the cash value growth within a life insurance policy is generally tax-deferred. In certain split-dollar arrangements, the executive may only be responsible for taxes on the policy’s “economic benefit,” rather than the full premium cost. This structure can be more tax-effective compared to other forms of income or investment gains.

Comparative Analysis: SDLI vs. Increased 401(k) Contributions

The decision between enhancing executive benefits through split-dollar life insurance versus boosting 401(k) contributions is multifaceted. Let’s explore the pros and cons of each approach in terms of cost, benefits, retention, and tax implications.

split life insurance pros

Split-Dollar Life Insurance Pros

  • Immediate Benefit and Security: Split-dollar life insurance provides immediate life coverage, offering financial security and peace of mind to executives and their families.
  • Tax Efficiency: Depending on the structure, the executive might only be taxed on the imputed interest from the loan arrangement, which can be less than the taxes on income or 401(k) contributions.
  • Customizable: The policy can be tailored to the specific needs and circumstances of the executive, such as varying the premium, death benefit, and policy terms.

Split-Dollar Life Insurance Cons

  • Complexity and Cost: These plans can be complex to administer and may require higher upfront costs due to premium payments.
  • Dependent on Policy Performance: The benefit value might fluctuate based on the performance of the life insurance policy, particularly in the case of permanent life insurance tied to investment components.
  • Possible Tax Complications: Tax implications for both employer and employee can be intricate and depend on the policy’s structure and IRS regulations.

Increased 401(k) Contributions Pros

  • Simplicity and Familiarity: Increasing 401(k) contributions is straightforward and well-understood by most executives, avoiding the complexity inherent in understanding life insurance products.
  • Long-Term Savings Growth: Enhanced contributions can significantly increase retirement savings and compound over time, benefiting from tax-deferred growth.
  • Immediate Tax Benefits: Increased contributions to a 401(k) can reduce current taxable income for executives, offering immediate tax benefits.

Increased 401(k) Contributions Cons

  • Delayed Gratification: Unlike life insurance, increased 401(k) contributions benefit executives in the future, lacking immediate tangible benefits.
  • Annual Contribution Limits: There are caps on how much can be contributed to a 401(k) annually, potentially limiting the benefit’s overall value.
  • Market Risk: 401(k) plans are subject to market fluctuations, and the investment risk lies with the account holder, potentially impacting the value of the retirement savings.

Retention and Cost-Benefit Analysis

Retention. Split-Dollar Life Insurance can be highly valued by executives, especially those seeking immediate and concrete benefits for their family’s security. Increased 401(k) contributions, however, might be more appealing to those focused on long-term financial growth and retirement planning. 

Cost-Benefit. While SDLI can offer a strong value proposition, the actual cost to the company can be high, and the benefits are contingent on the chosen policy and its performance. On the other hand, increased 401(k) contributions are generally more predictable in terms of cost and easier to manage but can be less personally tailored to the executive’s immediate needs.

Question of the day: How well do you know the financial goals of your key employees?

Closing Thoughts

Beyond Monetary Value is Security and Commitment

Offering split-dollar life insurance alongside 401(k) plans signals a company’s deeper investment in its executives’ welfare. This perception of value and security fosters loyalty and job satisfaction, crucial for retaining high-caliber talent.

The choice between split-dollar life insurance, increasing 401(k) contributions, or implementing both depends on multiple factors, including the executive’s personal and financial situation, company budget, and long-term retention strategy. While robust 401(k) plans are a cornerstone of retirement benefits, integrating split-dollar life insurance can elevate a compensation package from standard to exceptional. 

A thorough evaluation of these options with the assistance of a Prosperity Financial Advisor, can lead to the most effective and satisfying compensation package for both the executive and the company. 

Ready to redefine your executive compensation strategy? Contact us today to get started. 

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