Split dollar plan implementation: Leveraging today’s higher interest rates

Structuring an executive retention program using Split Dollar plans provides unique financial advantages for both the credit union and the executives. One decision point in the plan design process is whether to pre-fund the life insurance policy premium used to create the Split Dollar arrangement. A credit union has a number of options to pre-fund the life insurance premium in a Split Dollar arrangement. One of those options is to utilize a Premium Deposit Account (PDA) offered by the insurance carrier.

How does a premium deposit account work?

The life insurance policy premium is paid over time, with multiple scheduled annual payments, mainly to preserve the tax advantages of the policy. With a PDA, the amount to fund the entire premium schedule is sent to the insurance carrier. Funds in the PDA earn interest at the insurance carrier’s stated interest rate, thereby reducing the effective cost of the insurance premiums. The PDA also serves as collateral for the Split Dollar plan until the scheduled premium payments are completed. The annual payments are automatically made from the PDA on the scheduled date. The funds in a PDA can be liquidated should the need arise, without penalty in most cases. An annual 1099 is issued by the insurance carrier to Split Dollar participant for credited interest, which is taxable to the participant as ordinary income.

 

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