Another business use of life insurance is in situations where an employer is interested in providing an employee
with a supplementary benefit package. Supplementary benefit packages are often used by employers as a means
of attracting executives. These packages offer a wide assortment of benefits that may include life insurance
protection. The life insurance protection ensures that upon death the dependants of the executive receive an
inflow of capital that can be used to cover funeral expenses, education costs, reduce debt, and provide a future
stream of income.
The policy may be purchased by the business/employer, or may be owned and funded jointly by the employer
and the executive. The executive’s dependants would be named as the beneficiary of all or a portion of the policy.
The portion of the life insurance premium paid by the employer related to the executive’s interest in the policy
must be reported as a taxable benefit to the executive on the employee’s Statement of Remuneration Paid (T4
Supplementary Slip). It is important that the amount reported on the T4 slip represents a reasonable cost for the
Split Dollar Life Insurance
There are many situations in which an insurance policy is needed by one party to provide protection in
the event of death of an individual and another party has a need or desire for a tax-sheltered investment
vehicle. In these cases one policy can provide for the needs of both parties by using an arrangement
commonly referred to as “split dollar life insurance”. In these arrangements typically one party owns and
pays for a level death benefit portion of the policy, and the other party owns and funds the remaining
interests in the policy (generally the cash value).
In the business context a split dollar arrangement has numerous applications. For example, an employer
may have a need for key person insurance on an executive and the executive might have a desire for
tax-sheltered investment. The employer and the executive could enter into a split dollar arrangement
where the employer pays for and owns a level death benefit on the life of the executive and the executive
pays for and owns the cash surrender value component of the policy. The beneficiary of the level death
benefit is the employer, and the beneficiary of the cash value is designated by the executive (his spouse
The following table provides other examples of split dollar arrangements applicable to business situations:
Split dollar life insurance is discussed in detail in the Tax Topics “Split Dollar Life Insurance” which
analyzes the mechanics and technical details, and “Split Dollar Life Insurance – Applications” which
explores in more detail situations where split dollar life insurance can be used as a creative alternative to
solve complex problems.
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