A Story of a Gallery full of Rewards…

A little while ago, Yuseff had a problem. His gallery manager was considering a job offer from another gallery and that would only mean one thing: a drop in revenue.

The owner of a successful fine arts gallery of various media, Yuseff had built his gallery’s reputation by offering unique and often exquisite original and limited edition art in an elegant, yet relaxed atmosphere. In truth, much of that success was due to the efforts of David, his 48-year-old gallery manger. The 20-year veteran of the establishment had not only a strong presence in the community but had built a loyal following with Yuseff’s regular clientele which has grown across the entire coast. Often, David would visit customer’s homes or businesses prior to and after the sale to assure their satisfaction and build customer relationships.

Ok, it was also to continue the process of getting referrals but that’s another article.

While David's departure itself would be a blow to the gallery's bottom line, that was not Yuseff's primary concern. His real concern at the moment lay with David's loyal customers, who were telling him that they would bring their business as well as their best clients and friends, which they often referred, to wherever David was employed. In short, they wanted Yuseff to find a way to keep David.

What Yuseff needed was a way to make David want to stay, and his thoughts turned naturally to the idea of a fringe benefit. The gallery had a good Financial Consultant and already provided good pension and group insurance benefits; what was needed was something extra that could be offered exclusively to David.

Split-Dollar Insurance ... a Potential Solution

Whatever solution Yuseff came up with faced two hurdles. One was cost. The gallery was a solid business, but not so much so that it could afford another expensive fringe benefit plan. The other hurdle consisted of the federal regulations that restrict a business’ ability to pick and choose employees to receive special benefit treatment. Whatever solution Yuseff tried, it would have to be affordable and not subject to federal restrictions. After discussing the situation with his Financial Consultant, Yuseff's attention turned to an individual benefit plan called split-dollar insurance.

Devised decades ago as a cost-effective way for employers to reward themselves and their key employees, split-dollar insurance is a nonqualified fringe benefit that makes it easier for employees to acquire permanent life insurance for a minimal out-of-pocket cost (generally the “term cost” of the insurance.) "Nonqualified" means the employer's payments are not tax deductible, but it also means the plan is exempt from many of the federal regulations that apply to qualified benefit plans. The employer pays the premium (either some or all of it, depending on the agreement) and could recoup it later. The end result: life insurance protection for the employee and the potential for a full return of premiums to the employer.

In return for his continued service, Yuseff offered David a $500,000 policy funded exclusively by the gallery — coverage he could keep even after retirement. It was a hard offer to turn down, and after careful consideration David agreed to stay on.

Guess what, Yuseff was so impressed with the benefits of the policy he offered to David, he funded a policy for himself using split dollar.

I just love happy endings…

Ok, this is how It works

The employer and the employee enter into a formal written agreement that spells out the terms of the arrangement. In brief, the employer agrees to pay some or all the premium for an individual life insurance policy issued on the life of the employee and in return is reimbursed the premiums paid when the employee retires or dies. Even if the employee terminates, the employer could recover all or most of the premiums paid. In some arrangements the employer owns the policy (“endorsement” method) and in others the employee owns it (collateral assignment method).

Split-dollar plans come in a variety of colors and hues, but one constant holds true in every case: It relies on permanent life insurance. Why permanent life insurance? Because the cash value that is part of every permanent life insurance policy is the key to a return of premium to the employer — even while the employee/insured is alive. Any type of permanent policy may be used, including whole life, variable life, and universal life insurance.

There are practically limitless ways to fine tune an agreement to fit a particular need. The agreement may be written to give the employee the opportunity to acquire full policy ownership by "purchasing" the employer's share of the cash value which is usually equal to the premiums paid. This can be done in several ways, including a cash value loan, withdrawal from the cash value, cash from outside the policy or a note to be paid at the insured's death using death proceeds.*

How Does The Employer Recover Their Costs?

Under the most common form of split-dollar insurance, the employer pays all the premium. If the policy is surrendered, the employer may recover all its costs depending on the policy year and applicable surrender charges. In the event of the employee's death, the beneficiary (designated by the employee) receives the policy's face amount minus the sum of employer-paid premiums. By agreement, that share of the death proceeds is paid to the employer.


Why Split Dollar?

Split-dollar insurance is a versatile way for employers to help themselves and reward selected employees in acquiring valuable life insurance protection. It’s more than that though.

Split-dollar insurance is also a fringe benefit that in the end, costs both the employer and employee very little.


· Split-dollar insurance is a cost-effective way for employers to provide themselves and their key employees a valuable fringe benefit.

· Government restrictions applicable to tax-qualified employee benefit programs do not apply to split-dollar insurance.

· A written agreement assures the employer a full return of premiums paid at the employee’s termination (depending on policy year and surrender charges), retirement or death.


*Certain limitations may apply to loans or withdrawals. Policy loans and withdrawals will reduce the death benefit and cash values may be taxable under certain circumstances.

For additional information and to find out if a strategy like Split Dollar Insurance may be right for your business, contact Keith Jackson, Financial Consultant, Janney Montgomery Scott, LLC., 1801 Market St., Philadelphia, PA 19103, (215) 665-6477 or email at kejackson@jmsonline.com