Find out what split-dollar life insurance is, how it works, and its benefits, so you can make the best decision for you!
Split-dollar life insurance can be a beneficial strategy for employers and employees alike, allowing them to share the costs and benefits of a permanent life insurance policy. However, it’s crucial to understand more about it before diving in.
Let’s delve into it, how it works, and its benefits, so you can find out whether it works for you or not. Also, if you want to check out more financial tips on our website, you can click on this link!
What Is Split-Dollar Life Insurance?
It’s an agreement where two or more parties share a permanent life insurance policy, while also splitting the costs and the benefits. For example, an employer and employee enterinh into a written agreement outlining how they will split the premium payments, cash value growth, and death benefit payout of a permanent life insurance policy, such as whole life or universal life. These permanent policies build cash value over time, which can be accessed through loans or withdrawals.
How Does Split-Dollar Life Insurance Work?
There are two main types of arrangements with slightly different structures:
- Endorsement Split-Dollar: in this arrangement, the employer owns the policy but designates the employee as the beneficiary. This gives the employer more control over the policy but also means they are responsible for a larger portion of the premiums;
- Collateral Assignment Split-Dollar: here, the employee owns the policy and assigns a collateral interest to the employer equal to the premiums they pay. This gives the employee more control but may require them to repay the employer’s contributions if the policy lapses.
Benefits
- Employee Benefits: employees gain access to a permanent life insurance policy with a potentially lower premium cost compared to purchasing one individually. They also benefit from the cash value growth, which can be a valuable savings tool;
- Employer Benefits: Employers can attract and retain key talent by offering a valuable benefit. They can also gain some coverage for potential business disruptions caused by the employee’s death. Additionally, the employer’s premium payments may be tax-deductible as a business expense.
| Benefit | Description |
|---|---|
| Cost Sharing | Employers often pay the premiums when they own the policy, but they may share these costs with employees in certain scenarios |
| Payout for Both Parties | Both the employer and the insured’s beneficiaries can receive portions of the death benefit. Additionally, the premium payer may recover their expenses |
| Low Interest Rates | In a loan arrangement, the employer charges interest on the loan to the employee, typically using a minimum below-market rate |
| Valuable Compensation | Including split-dollar plans in executive compensation packages can help employers attract and retain top talent, offering employees valuable life insurance that fosters loyalty |
How Are Split-Dollar Plans Terminated?
- Employee Leaves the Company: the termination agreement will dictate how the policy is handled. The employee may need to purchase the employer’s interest in the policy, or the employer may simply surrender their interest;
- Employee Dies: if the employee dies while the agreement is in place, the employer recovers the policy’s cash value, premiums paid, or outstanding loan amount as per the agreement. The remaining amount is paid to the employee’s beneficiaries as a tax-free death benefit;
- Agreement Term Ends: when the agreement term ends, the termination method depends on the type of arrangement:
- Loan Arrangement: the policy ceases to be collateral;
- Economic Benefit Plan: the policy may be transferred to the employee, resulting in taxable income for the employee, which the employer might deduct as a business expense.