Split Dollar Life Insurance

What Is Split-Dollar Insurance?

The split-dollar insurance concept was developed as a funding tool to help an employee obtain life insurance coverage at a cost that is lower than would otherwise be possible. This is achieved by having premiums shared between employee and employer. In return, the business is generally reimbursed its outlay by receiving a portion of the death benefits at the employee's death. If the employee leaves the company, the employee repays the company its outlay (generally from accumulated cash value).

This solves problems whereby a business owner has a key employee, which needs life insurance but cannot afford the entire premium? With the split-dollar concept, the business pays a portion of the premium and is later reimbursed from the policy's proceeds or cash values. Accumulated cash value is often the "collateral" for premiums paid by the employer, a policy with that feature is generally used.

Who Needs a Split Dollar Plan?  

If you are a sole proprietor, partner or co-owner of a closely-held business, you: Want the business to subsidize the purchase of cash value life insurance as an employee benefit. This can be especially valuable for individuals whose premiums might be prohibitively high owing to their age or health conditions, or, conversely, for those who are young and on tight budgets.

Another need for this type of policy is to use life insurance as a funding vehicle for a buy-sell agreement where there is a large age discrepancy between the parties. In a parent-child buy-out succession plan, for instance, a split-dollar arrangement can help the child afford the insurance premiums on the parent.

How Does It Work?  

The basic split-dollar arrangement calls for the employer and employee to enter into an agreement to purchase a cash value life insurance policy on the life of the employee. Either the employee or employer applies for and owns the policy and selects his or her personal beneficiary. There are various options in which premium payments and policy benefits may be split between the two parties.

Under the terms of the agreement, the employer pays all or a portion of the annual premium. If the employee dies, an amount of the death benefit equal to the employer's outlay is assigned to the employer. If the employee is terminated or leaves the company for any reason, the employee is responsible for repaying the employer's outlay (either out of pocket or, if available, by borrowing cash value accumulated in the insurance policy).

 
An Example of a working Scenario

Kathy and her employee, Dawn, agreed to buy a $200,000 life insurance on Dawn’s life. Dawn had some health problems, which increased her premiums, and Kathy agreed to have the business pay a portion of the premiums. When Dawn passed away, several years later, the business had contributed $25,000 in premiums. The business was reimbursed that amount from the proceeds of the policy, while Nancy's beneficiaries received the remaining $175,000.

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Who Needs Life Insurance and How Much is Enough
Life Insurance for Estate Protection Business Continuation Planning

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Biz Owner / Executive Compensation Using an Executive Bonus Plan
Biz Owner / Executive Compensation Using a Deferred Compensation Plan
Buy / Sell Agreement
Key Person Coverage
Executive / Biz Owner Compensation using Split Dollar Strategy
Keeping Your Business in the Family
Bringing Children into the Family Business 

What is a Fixed Annuity
What is a Variable Annuity 

Section 125 Cafeteria Plan

Retirement Plan Comparisons
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Content is for informational purposes only and may not accurately reflect your specific situation. Information is not intended to provide legal, tax, or accounting advice. You should consult a qualified advisor for advice specific to your own circumstances.