CreativityA Blessing And A Curse
Over the years people in our business have used great creativity in expanding the uses of life insurance. Fertile minds have found new ways to use our products to such a degree that sales have far exceeded any level envisioned by the practitioners of yesteryear. That is the blessing of creativity. But new frontiers also are fraught with danger that can, at times, become a curse.
One of the great misconceptions that persists in our business is that government meddling has caused us to be essentially reactive in our approach to legislation affecting our products. In fact, exactly the opposite is true. We are the creative and innovative element in our marketplace and government is the reactive force. We create, government reacts.
There are many examples to illustrate this point: Top heavy pension plans, single premium tax shelters and misleading sales illustrations have all evoked government reaction. Perhaps it would be instructive to examine a current case in point.
More than 50 years ago a person whose name has been lost to history came up with an idea for expanding the use of our product which has since been dubbed “split-dollar insurance.” Split-dollar in its original form was essentially just a way to pay a premium. It simply combined the premium-paying ability of one party with the insurance needs of another party. Use of this technique in most cases enabled an employer with premium-paying ability to help a valued employee secure life insurance on a favorable basis. It was truly a win-win situation, for there were direct and indirect benefits that flowed to both parties in the transaction.
As the practice became more widespread and the applications more creative, government began to take notice. In 1964 the government ruled that there was a taxable event taking place in split-dollar arrangements in that an economic benefit was being transferred from the party with the premium-paying ability to the other party. Government reacted with Revenue Ruling 64-328, which for the first time taxed a portion of premium to the insured.
But this was not the end of split-dollar, rather it was the beginning of a host of creative variations. Some of the creations did not fly and succumbed to government reaction. But many succeeded and became very useful in designing a variety of executive compensation arrangements as well as cooperative ventures with charities.
But, over time, some plans overreached and in one way or another the economic benefit being realized was not being adequately recognized or taxed. The result has been the inevitable reaction by government or you might say, the curse of the excess creativity. The new ruling will not kill split-dollar, but it will inhibit some of the more adventuresome plans and no doubt add fuel to the concept of government meddling in our business.