A second home for your nest egg.

• Author: Alexander, Neil
• Position: Split-dollar insurance - Includes related article - Personal Financial Planning

Don't bet on your company's 401(k) for retirement security. That's the message behind recent tax changes that have tightened restrictions on how much high earners can contribute to their 401(k) plans and any other qualified retirement plan. As a result, many financial executives and their companies are seeking new solutions to get the most mileage out of their retirement dollars.

That's where split-dollar insurance comes in. It's a retirement planning vehicle that costs you and your company very little. Also, properly structured, the plan builds up a hefty sum that you can later access tax-free, while providing your heirs with significant death benefits.

Split-dollar insurance works just the way it sounds. The premium payments and policy benefits are split between two parties -- in this case, the company and the executive. The company advances most of the premiums for a cash-value policy, such as whole life, universal life or variable life. The executive, while owning what would normally be an expensive cash-value policy, pays a premium that is equivalent to an economical term insurance policy. The executive's portion of the premiums pays for the death benefit, while the company's portion of the premiums helps build the policy's cash value.

The company eventually gets its premium money back, usually without interest, from the cash value in the policy if either it or the executive ends the split-dollar agreement, or from the death benefit if the executive dies. The executive and his or her heirs get the remainder of the benefits.

A split-dollar life insurance policy has some significant advantages over a 401(k). It doesn't require you to begin withdrawals by age 70 1/2, as does a 401(k). And you can withdraw money before age 59 1/2 without penalty. It also doesn't have the punitive surcharge tax 401(k) plans impose on retirees who receive more than $150,000 in combined annual payouts from their retirement plans. And if you maintain the insurance policy until death, no income taxes will ever be due on the investment gains that have built up inside the policy. Lastly, if you transfer your policy to an insurance trust more than three years before your death, the death benefit may escape estate taxes entirely. In contrast, 401(k) savings are subject to both income and estate taxes.

A split-dollar policy can be structured according to your retirement and estate-planning goals. If you want a large cashflow for retirement, you can design the policy...