Definition
Split Dollar Life Insurance is an arrangement where a permanent life insurance policy’s premiums, ownership rights, and death benefit proceeds are shared between two parties, typically an employer and an employee or a parent and a child. This type of policy can leverage tax advantages, offer financial security, and incentivize retention or loyalty.
In such agreements, the employer generally pays the portion of the annual premium that corresponds to the increase in the policy’s cash value, and sometimes the employer covers the entire premium. Upon the death of the insured, the policy beneficiary appointed by the employee receives part of the death benefit, while the rest is paid back to the employer to recover premiums paid.
Examples
Employer-Employee Arrangement: An employer takes out a split-dollar life insurance policy on a key employee. The employer pays the premiums and is reimbursed from the policy’s cash value or death benefit. The employee’s beneficiary receives the balance of the death benefit.
Parent-Child Arrangement: A parent establishes a split-dollar life insurance policy in which the parent pays the premiums. Upon the parent’s passing, the death benefit is split between a beneficiary selected by the child and the reimbursement of premiums to the parent’s estate.
Frequently Asked Questions
What is the advantage of a Split Dollar Life Insurance policy?
The main advantage is its cost-sharing aspect, allowing the benefits of life insurance to be extended to employees at a lower cost. It also may offer tax advantages and incentivize key employees to stay with the employer.
Who owns the split-dollar life insurance policy?
Ownership usually depends on the structure of the split-dollar agreement. It can be jointly held by both parties, or the ownership rights can reside with either the employer or the employee, depending on the agreement terms.
Can the terms of a split-dollar life insurance agreement be modified?
Yes, the terms can generally be modified, but any changes should comply with IRS regulations and be documented in writing to maintain clarity.
How is the death benefit divided in a split-dollar life insurance policy?
Typically, the death benefit is split according to the agreement, where the employer is reimbursed for their premium contributions, and the remaining benefit goes to the employee’s designated beneficiary.
Are there different types of split-dollar agreements?
Yes, there are primarily two types: the endorsement method (owner retains ownership) and the collateral assignment method (employee owns the policy but assigns the right to the cash value back to the employer).
Related Terms
- Cash Value Life Insurance: A component of permanent life insurance policies where a portion of premiums goes into a cash value account that grows over time.
- Death Benefit: The amount paid out to the beneficiary upon the death of the insured.
- Premium: The regular payment made to an insurance company to keep the policy active.
- Beneficiary: The person or entity designated to receive the death benefit from a life insurance policy.
Online References
Suggested Books for Further Study
- “Insurance and Risk Management: The Complete Guide” by Richard H. Hrab.
- “Life Insurance: A Consumer’s Handbook” by Joseph M. Belth.
- “Risk Management and Insurance” by Scott E. Harrington and Gregory R. Niehaus.
Fundamentals of Split Dollar Life Insurance: Insurance Basics Quiz
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