An exception to the previous (one where you WOULD be able to separate
out the "cost of the insurance component").
Split dollar life insurance.
This is something an employer might include in the compensation package.
Especially as serves as an incentive for the employee to stay at least
until becomes a positive value.
This is a cash value policy, usually "whole life", premiums paid by the
employer and owned by the employer, but with certain rights given to the
employee.
a) The right to name the beneficiary (who gets the face value if you die)
b) The right to "buy out" the policy by paying the employer back all the
premiums to that point.
c) The right to have the policy surrendered and receive the amount by
which the sum of the premiums paid is less than the cash value (if not
less, you would owe that amount, hence the incentive to stay).
The "cost of insurance" is the amount of the premium required to pay for
the equivalent in term insurance and is reported to you on your pay
statement. In other words, part of your taxable pay but you don't
actually receive it as used pay for insurance. This is similar to the
deduction for "group life" insurance which might also be offered as part
of the compensation package and can be up to five years salary (but only
the first $50,000 is tax free). But it is that "cost of insurance" part
of "split dollar" that gives it the name of "split".
Anyway -- because in THIS case the cost of the term insurance is split
out for you you could account for that as an ordinary expense. Since
split dollar is usually thought of as an investment (where the employer
puts up the capital) You might record the annual premium paid (less the
"cost of insurance part" debit expense and credit a liability (you in
effect owe the company for those premiums, payable from proceeds if/when
the policy is surrendered (or from your pocket if you choose to buy the
employer out and keep the policy. Note that the decision which option to
choose would be made at the time of leaving based upon your health
status at this future date.
For those still unclear about what this employee benefit is --
essentially the employer is letting you profit from an investment where
they provide an interest free loan for the capital and the right to make
a future "adverse selection" decision << your health is poor, but the
company has to let you buy the policy at the standard premium rate, not
the much higher premium charged somebody in poor health >> They are
also giving you (in the meantime) the right to name the beneficiary and
they are paying for that but the IRS considers THAT to be a taxable
benefit so you pay tax on this small bit of income that you never
received in hand.
Michael D Novack
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