Source: The
Globe & Mail
Date:
If I could
start a new trend, it would be eyebrow and nose piercing in my
profession-accounting. I think there is money to be made manufacturing
calculator shaped nose rings.
And if that
doesn't catch on, I'd like to see another trend, this time in employee
compensation. You see, employees aren't exactly entitled to claim a plethora of
deductions. Never have been. Never
will be. So why is that employers insist on, and
employers accept, straight salary as the only source of compensation?
Salary is fully taxable, and not particular creative.
THE PERK
I've
written before about non-taxable benefits that employers can offer there
employers (see www.timcesnick.com).
Today, I want to share a different type of perk that is quite creative. I’m
talking about life insurance. Specifically split-dollar life
insurance.
You see, a
universal life (UL) policy has two essential components to it: the death
benefit (or face amount) of the policy, and the investment component. A portion
of each premium dollar that you pay on the policy covers the " net cost of
pure insurance" to fund the death benefit, while the remainder goes into a
growing pool of investments inside the policy (if you opt to invest in the
policy, which can make sense since investment earnings grow tax sheltered
inside the policy). Both the death benefit and the investment component of the
policy are paid out tax-free at the time of the insured's death.
You need to
understand that the investment component of the policy can be accessed by the
owner of the policy, perhaps a supplement retirement income from other sources. Amounts invested in the policy can be
withdrawn on a taxable basis, or accessed in other tax-free ways.
HAVE
EMPLOYER PAY YOUR SHARE
Your
employer would be responsible for paying that part of the premium that relates
to the death benefit, while you would be responsible for the balance of the
premium-the portion that goes into the investment component of the policy. This arrangement can be a real perk,
because you have the opportunity to take advantage of tax-sheltered investing
inside a life insurance policy without having to pay for the actual cost of the
insurance (your employer pays for that).
I like one more twist on this, however.
Why not
negotiate to have your employer pay your share of the premium in addition to
his own? This will result in a taxable benefit to you, but it will still cost
you less than paying for the premium yourself.
Further, your employer should be able to deduct the cost of this
employee benefit (although I recommend adding this benefit to your employment
contract to strengthen the argument that lt.'s deductible to your employer.) If you are a shareholder, the employee
benefit may not be deductible.
THE RESULT
Consider
the result. If your a non-smoking male, age 45, your
employer can purchase a UL policy with a $450,000 death benefit that will
cost $10,000 in premiums annually if the intent is to build up as much as
possible in the investment component of the policy. If your employer owns the
death benefit, his premium will be $4,010 annually. The balance of $5,990 is
your share, and goes into the investment component.
If you were
to retire at age 65, you'd have $297,373 in the investment component of the
policy available to you. By age 70, that amount is projected at $462,371. By
age 80, the amount would be $1,032,595. These numbers calculated by ManuLife, assume a 6% annual rate of return.
Upon your
death, your beneficiaries will receive, on a tax-free basis, any amount left in
that investment component of the policy. As for your employer, he'd receive the
$450,000 death benefit tax-free, as a reimbursement of those costs he paid on
the policy over the years.