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Accounting for Split-Dollar Life Insurance Plans
Thursday, February 16, 2017 6:40 AM

Cheryl Ehmann, AVP Staff Analyst, Credit Union Resources

Collateral assignment split-dollar life insurance arrangements are becoming more common in the credit union arena. One of many forms of deferred compensation benefits, it's an arrangement between the credit union and a key employee in which a life insurance policy is shared (or “split”). The various aspects of the policy that can be divided include cash values, premiums, death benefits, ownership, and dividends.

Normally a loan is made to the employee for the total of the premiums to be repaid with the death benefits from the policy. However, there can be numerous variations in the contracts.

Accounting Standards Codification Topic 715-60 states that if the credit union has an obligation, either stated or implied, to maintain the policies in the post-retirement period or to cover experienced losses of the insurance contract or company, the premium loan must be accounted for as a retirement benefit expense.

In the case of these obligations, the following accounting treatment would be required (retirement benefit expense treatment):

  • Asset. The credit union records an asset for the cash surrender value of the life insurance policy owned and controlled by the employee and collaterally assigned back to the credit union for security.
  • Liability. The credit union estimates and records liabilities for the obligation to the employee.
  • Gain or loss. A gain or loss is recognized for the difference between the net obligation of the previous deferred compensation plan and the new split-dollar plan, if this plan replaces another.

In the absence of these obligations, the following accounting treatment would be required (loan treatment):

  • Asset. The credit union records a receivable amount for the loan provided to the employee to fund the insurance policy. 
  • Liability. No liability is recorded because the credit union isn’t obligated to provide additional loans to fund the policy premiums or to guarantee the retirement benefit.
  • Gain. The credit union recognizes a gain for the amount of the previous plan liability that was rescinded, if this plan replaces another plan.
  • Other income. Interest receivable on the loan accumulates, and the credit union recognizes it as other income on the income statement.

Because there are so many plan variations out there, it's essential you work with the plan administrator to understand all aspects of the plan before it is adopted. Due diligence is the key here. The sales representative may or may not understand the accounting implications—if they don’t, ask to speak to someone else at the company who does.

Split-dollar life insurance is one of many deferred compensation options available to key credit union employees. Be sure to weigh all your options before making a decision.