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CaliBen

Taxation of Lloyd's Specialty Life Insurance

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Not sure which message board to post this. 

Client is purchasing life insurance [contractual protection insurance?] from a Lloyds specialty broker to provide coverage to key executives above what is available in group plan. Client will be owner and pay premiums, but executive will be able to name beneficiary. 

Can the client impute income to executives based on Table I rates, and then the benefits paid would be received tax free? Or does the full premium amount need to be included as taxable income like a 162 bonus plan? Or will death proceeds be taxable to estate, or as income in respect of a decedent, or taxable to the beneficiary? 

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Sounds more like endorsement split-dollar, o taxation based on the economic benefit regime, so imputing would be based on Table 2001, not Table I.  The final split-dollar regulations that were issued in September 2005 notes that imputing should be done based on a life insurance premium factor, which has never been defined.  In the meantime, unless there are carrier term rates that are lower, Table 2001 is the de facto table to use.  In this situation, the death benefit would be income tax-free to the beneficiary.

If the insured only has the right to name the beneficiary, then the arrangement is treated as only providing a death benefit and is exempt from 409A.

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Thank you for the response. A follow up question. If imputing based on Table 2001 is the employer able to deduct the premium cost? There is no cash value and the employer will not receive any of the death benefit or any other type of recovery. 

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I have not reviewed the arrangement, seen your documents, etc., but the employee's imputed income under Table 2001 is treated as compensation on W-2, and so generally with endorsement split dollar that amount (i.e., what the employer puts on W-2) is deductible by the employer. Of course, the premiums the employer actually pays on the policy are not deductible because you can never deduct life insurance premiums.

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Would beg to differ as to nomenclature and tax treatment. This is not a split dollar arrangement as the policy has no cash value and the employer has no interest in the policy proceeds. It can, and probably should, be treated as part of the employer's group life plan and Table I used for imputed income.

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16 minutes ago, FPGuy said:

Would beg to differ as to nomenclature and tax treatment. This is not a split dollar arrangement as the policy has no cash value and the employer has no interest in the policy proceeds. It can, and probably should, be treated as part of the employer's group life plan and Table I used for imputed income.

FPGuy, you're probably right on the table, but that would require that the executive's are covered by group, not individual term, right?

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Luke - A group plan can incorporate individual term policies owned by the employer (as a group policy is). Not necessarily using Lloyd's specialty policies, but more prosaic term, this is not an uncommon way to provide enhanced coverage for key execs. Advantages typically include better conversion and portability options for the insured; better pricing on the base group by limiting base group coverage limits.

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