A second home for your nest egg.

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 to provide a high cash value and a low death benefit. If you want your heirs to have money to pay estate taxes, you can design the policy with a higher death benefit and lower cash value.

PUT YOURSELF IN HIS PLACE

Take hypothetical Carl Grady as an example. Grady, who earns $180,000 per year as CFO of his company, is permitted to contribute only $9,240 annually to its 401(k) because of the new tax restrictions, so he's thinking about other places to put his retirement savings. If he and his company use the split-dollar agreement, the company pays just under $10,000 a year for the policy. The policy has a relatively low death benefit of $490,000.

Grady's premium payments are only $398 in the first year of the policy, and rise slightly each year as he gets older. His premium is based on the insurance carrier's least expensive term insurance policy rate. That's because his liability is determined by the PS 58 table in the tax code, which defines the economic value of life insurance split between an employer and an employee. The economic value based on the death benefit is available to the employee's heirs.

If Grady dies one year after entering into the split-dollar agreement, the company gets back the $10,000 in premiums it advanced to the insurance carrier. The carrier takes this money from the death benefit. Grady's heirs get the remaining $480,000 in death-benefit money. Grady's company maintains its lien against the death benefit for the total premiums it has advanced, until the split-dollar agreement is terminated.

But suppose Grady stays healthy. At age 62, he decides to retire. He terminates his split-dollar agreement with his company. Grady uses the cash value -- now approximately $400,000 -- to pay the company back for the $187,000 it advanced in premiums. The net effect: Grady has a policy with $240,000 of cash in it that he can access tax-free for his retirement needs.

So how can you convince your company to offer split-dollar insurance coverage? At first glance, split dollar might not seem like such a good deal for an employer. Life insurance premiums are rarely deductible, unlike qualified-plan contributions. But while corporations can't deduct their portion of the split-dollar premium, they eventually recover nearly all of their money.

Also, companies can use split-dollar programs to attract and retain key people. The corporation makes a virtually interest-free loan to the executive, while allowing the executive to retain the cash-value earnings that the loan generates.

Corporations also have pragmatic reasons for using split dollar. Many executives own large blocks of stock in their company, which, if sold, could sharply reduce share prices. Companies don't want to risk the possibility of the executive liquidating shares to fund retirement needs. They also don't want the heirs to be forced to sell a large number of shares to pay estate transfer taxes. Split-dollar policies afford companies -- and you -- some extra protection. And, after all, that's what your retirement savings are all about.

BEFORE YOU START NEGOTIATING

Not all split-dollar agreements are created equal. And the same holds true for the insurance policies behind them, the carriers that offer them and the agents that sell them. Here are a few considerations to keep in mind when negotiating a split-dollar agreement with your company.

Generally, split-dollar insurance doesn't cost the company anything. But it can have a balance-sheet impact when the company records the cash value of the life insurance contract on the books. Many insurance policies don't build cash value until several years into the policy because the first years' premiums go to pay for the agent's commissions. To avoid a negative balance-sheet impact, you and your company must structure the split-dollar policy to create an almost immediate and significant cash-value accumulation.

To be effective for you and palatable to your employer, the policy should be designed so that your agent's commissions are spread out over a number of years. This allows a greater portion of your company's premiums to be directed towards cash-value buildup.

Also, see if your agent's overall total commissions can be reduced. The less the agent receives, the greater the policy's cash value. It's possible for 50 percent to 70 percent of a company's premium in the first year to go toward cash value. And, in the second year, the cash value can equal the company's premium.

Although all insurance policies can be structured as split-dollar vehicles, some insurance carriers' policies clearly provide better arrangements than others. The better policies allow the agent to manipulate the relationship between the policy's critical factors for the client's benefit, namely the agent's compensation, the cash value and the death benefit.

Most important of all, do your research on the insurance company. Because split-dollar arrangements are usually long-term, you should purchase the policy from a stable, well-capitalized life insurance company.

Mr. Alexander is president of Alexander Capital Consulting in San Diego.