Shared Interest Critical Illness Insurance, also known as split-dollar critical illness insurance, is a strategic insurance solution designed to benefit both businesses and their key employees. This approach allows companies to protect themselves against the financial risks of a key employee developing a critical illness while offering the employee financial incentives should no illness occur over the policy’s term. This strategy effectively balances risk management and employee retention.
How Shared Interest Critical Illness Insurance Works
Shared ownership insurance operates under a mutual agreement between the business and the insured individual. The corporation typically pays for and owns the critical illness policy, receiving the lump-sum benefit if the insured employee is diagnosed with a covered critical illness. On the other hand, the employee pays for the Return of Premium (ROP) benefit and receives a refund of premiums if the policy terminates or is surrendered without a claim.
A typical shared ownership agreement is structured as follows:
- Corporation: Owns, pays for, and is the beneficiary of the lump-sum benefit.
- Employee/Shareholder: Pays for the ROP benefit and receives a refund of premiums if no illness occurs.
This setup ensures that both parties share the benefits and costs of the policy. The agreement must be drafted by a qualified legal advisor to ensure clarity and enforceability.
Benefits for Your Business
Shared Interest Critical Illness Insurance offers several advantages for businesses, including:
Business Continuity and Protection
If a key employee develops a critical illness, the policy’s lump-sum benefit provides financial support to:
- Hire temporary replacements
- Cover salary obligations
- Maintain operations and reassure stakeholders
Tax Efficiency
The lump-sum benefit the business receives is typically tax-free, making it a cost-effective tool for financial protection. However, companies should consult tax advisors to ensure proper structuring and avoid unintended liabilities.
Employee Retention and Attraction
Offering this type of insurance enhances your ability to attract and retain top talent. Employees appreciate the dual benefit of financial protection during illness and a return on premiums if they remain healthy, especially as they approach retirement.
Return of Premium
The ROP feature incentivizes key employees to stay with the organization while providing a financial safety net. If no illness occurs, employees receive a refund of their premiums, offering peace of mind and long-term value.
When Does This Strategy Make Sense?
Shared Interest Critical Illness Insurance is particularly beneficial when:
- Small businesses need protection to cover operational costs during an employee’s recovery.
- Key employees seek additional financial security to manage potential health or living expenses.
- Both parties value a solution that provides tangible benefits, regardless of whether an illness occurs.
Tax Considerations
While the premiums paid for critical illness insurance are not tax-deductible for the corporation or individual, the lump-sum benefit is generally received tax-free. However, the tax implications of the ROP benefit can vary, and in some cases, it may be taxable. Businesses should work with professional tax advisors to navigate these nuances and ensure compliance with current tax laws.
Strengthening Your Business with Shared Interest Insurance
Shared Interest Critical Illness Insurance is a strategic solution that benefits both businesses and employees by providing financial protection during critical health events while offering a potential return on investment if no claims are made. This approach delivers value and peace of mind for business owners seeking innovative ways to manage risk, attract talent, and enhance financial planning.
To learn how Shared Interest Critical Illness Insurance could fit into your benefits strategy, contact Finuity Wealth for expert guidance tailored to your business needs.
