Split dollar life insurance has become popular in the last few decades. Under this arrangement, the costs and benefits of the insurance are divided between two parties, usually an employee and employer.
In a typical split dollar insurance contract, the employer pays all or part of the policy premiums. If the insured person dies while the contract is in effect, the employer gets a portion of the death benefit equal to the total premiums the employer has paid in. For example, if the policy is for $250,000 and the employer has paid in a total of $30,000 in premiums, the employer gets the first $30,000 of the death benefit; the remaining $220,000 goes to the insured person’s beneficiary.
Split dollar insurance policies are most common as part of a benefits package for senior executives. Business owners sometimes also use them as a way to get life insurance at a lower cost.
Split dollar policies can be attractive to both parties. The employer is assured of recouping its cost, while the employee gets a life insurance policy at a reduced cost because the employer is helping to pay the premiums.
Another advantage of split dollar policies is that they are flexible and can be customized to meet the needs of both parties. There are different split dollar arrangements that are possible. In most cases, the employee owns the policy, designates beneficiaries, and transfers a portion of the death benefit to the employer in return for the employer paying the premiums. If the employee leaves the company, the employer’s part of the premiums is reimbursed from the cash value of the policy.
In some cases, the employer owns the policy. It designates itself as a beneficiary for an amount equal to the premiums paid and designates the rest of the death benefit to be paid to the employee’s beneficiaries.
The death benefit paid out from the policy is generally tax-free for both the employer and the employee’s beneficiaries.
However, the laws and regulations regarding split dollar insurance can be complicated for both the company and the employee. The employer’s portion of the premiums may be regarded as taxable income for the employee. The cash value of the policy that the employee has access to may also be taxable, even if the policy has not been cashed out. For the employer, the share of premiums paid is generally not tax-deductible.
It’s a good idea to consult a qualified financial advisor about the regulations and tax implications before entering into a split dollar insurance arrangement.