Using Endorsement Split Dollar as a Powerful Planning Strategy 

Let’s explore a recent case where a business owner was looking to retain a key employee. She first explored offering an executive bonus plan or REBA plan to the employee, but ultimately decided she wanted more control over the policy. The solution was an endorsement split dollar plan with John Hancock’s Accumulation IUL. This simple yet effective plan gave the business owner increased control over the plan while providing a powerful way to benefit the key employee.

Case Study:

Caroline owns a successful medical practice and employs Tom (40, PNS), a nurse practitioner who is integral to her operation.  Caroline has $20k of discretionary dollars to put towards a plan to reward Tom and help ensure that he stays with her practice.  Caroline’s minimum “golden handcuff” period is 10 years (i.e. the period of time she wants Tom to remain working for her business). A REBA provides a “golden handcuff,” because Tom would own the policy and would be required to pay back all of the premiums paid.

• Caroline likes the REBA approach, but because she doesn’t have access to policy cash values, she is concerned that it would be difficult to get the money owed to her from Tom directly if he leaves. She would like a little bit more control over the plan and policy.
• To address some of these issues, Caroline ultimately decides to implement an endorsement split dollar plan, allowing the business to own the policy while still providing a meaningful benefit to Tom. 

The Plan: Endorsement Split Dollar with Accumulation IUL

How it Works

• Caroline funds an Accumulation IUL policy with $20k of annual premium. Caroline’s business owns the policy, and endorses a portion of the death benefit to Tom. Tom pays tax annually on the economic benefit cost of his share of the death benefit.  
• The policy is structured with an annual premium due until Tom’s age 65. If after ten years (when Tom is age 50), the business bonuses him the policy, they can continue to bonus the outstanding premiums as an additional benefit. For the first ten years, the endorsed death benefit provides Tom with a valuable benefit.
• If Tom leaves in the first 10 years, the medical practice owns the policy (including the death benefit and cash value) and there is no obligation to transfer the policy.
• If Tom remains with the practice, in year 10 the practice can then bonus out the policy to Tom, further motivating him to stay with the firm long-term. 

Why it Works:

• The medical practice can provide Tom tax-free death benefit protection today with the option of providing a valuable benefit in the future 
• Caroline retains full control over the life insurance policy for as long as the business owns it
• The benefit can act as a “golden handcuff” for Tom
• If Tom should leave the company, he has no obligation to pay back the life insurance premium 

The Result

The endorsement split dollar plan was a win-win – the medical practice was able to provide a valuable benefit to Tom while still allowing Caroline to have increased control over the policy for the critical 10-year time period.