Split-dollar life insurance is a type of life insurance policy that is typically established between an employer and employee, or between two individuals. Under this arrangement, the premiums and death benefit of the policy are split between the two parties. The employer or owner of the policy typically pays a portion of the premium while the employee or other party pays the remainder. Split-dollar life insurance can be used as a way to provide key employees with additional benefits or to fund a buy-sell agreement between business partners.

Split-dollar life insurance is a type of life insurance policy that is typically established between an employer and employee, or between two individuals. Under this arrangement, the premiums and death benefit of the policy are split between the two parties. The employer or owner of the policy typically pays a portion of the premium while the employee or other party pays the remainder. Split-dollar life insurance can be used as a way to provide key employees with additional benefits or to fund a buy-sell agreement between business partners.

What is a split dollar life insurance policy?

Split dollar life insurance is a type of life insurance policy that is jointly owned by two parties, typically an employer and employee, or two individuals. The policy’s death benefit and premium payments are split between the two parties according to a predetermined agreement.

In a typical arrangement, the employer pays a portion of the premium payments, while the employee pays the remainder. The parties involved can also agree on how the death benefit will be divided.

Split dollar life insurance policies can be used for a variety of purposes, such as providing an additional employee benefit or as a tool for funding a buy-sell agreement between business partners. The policy can also offer tax advantages, such as a tax-free death benefit for the employee's beneficiaries.

Benefits of Split-Dollar Plans

Split-dollar plans can offer several benefits to both employers and employees.

Here are some of the benefits: 

• Enhanced Employee Benefits: Split-dollar plans can be used to provide key employees with an additional life insurance benefit, which can be a valuable tool in retaining top talent.
• Tax Advantages: Split-dollar plans can offer several tax advantages. For instance, the death benefit paid to the employee's beneficiaries is typically tax-free. In addition, the employer may be able to deduct a portion of the premium payments.
• Flexible Arrangements: Split-dollar plans can be structured in several ways to suit the needs of both parties. For example, the parties involved can agree on how the premium payments and death benefit will be split.
• Business Continuity: Split-dollar plans can be used as a tool for funding a buy-sell agreement between business partners. This can ensure that the business continues in the event of a partner's death.
• Estate Planning: Split-dollar plans can be used as a component of estate planning for high-net-worth individuals, offering tax advantages and helping to preserve wealth for future generations.

Terminating Split-Dollar Plans

Split-dollar plans can be terminated for various reasons. Here are some of the ways split-dollar plans can be terminated:

• Employee Termination: If the employee leaves the company or is terminated, the split-dollar plan can be terminated. In this case, the employer can choose to keep the policy in force and pay the full premiums, transfer ownership to the employee, or cancel the policy altogether.
• Policy Maturity: If the policy matures and the death benefit is paid out, the split-dollar plan terminates automatically.
• Agreement Termination: If the parties involved decide to terminate the split-dollar agreement, they can do so by following the terms of the agreement. This may involve paying back any loans, transferring ownership of the policy, or canceling the policy altogether.
• Policy Surrender: If the parties involved decide to terminate the policy before it matures, they can surrender the policy for its cash value. This may result in tax consequences for both parties.

It's important to note that terminating a split-dollar plan can be a complex process, and the parties involved should seek the advice of legal and financial professionals before making any decisions.

Who Owns a Split-Dollar Policy?

In a split-dollar policy, the ownership of the policy is shared between two parties, typically an employer and an employee, or two individuals. The policy is jointly owned by the two parties, and each party has a stake in the policy's death benefit and cash value.

In a typical arrangement, the employer owns a portion of the policy, usually the portion equal to the premiums paid by the employer. The employee owns the remaining portion of the policy, usually the portion equal to the premiums paid by the employee, plus any cash value that has accumulated.

The ownership of the policy can be structured in different ways, depending on the specific agreement between the parties. For example, the parties may agree to split the ownership equally, or they may divide it in a different proportion, such as 70/30 or 80/20.

It's important to note that the ownership structure of a split-dollar policy can have significant tax implications, so it's essential to seek the advice of legal and financial professionals when setting up a split-dollar arrangement.

What is the Benefit of Split-Dollar Life Insurance?

The benefits of split-dollar life insurance can vary depending on the specific arrangement between the parties involved. Here are some potential benefits:

• Enhanced Employee Benefits: Split-dollar life insurance can be used as a tool to provide key employees with additional benefits beyond their regular compensation. This can be a valuable incentive for employees and can help companies retain top talent.
• Tax Advantages: Split-dollar life insurance can offer several tax advantages. For example, the death benefit paid to the employee's beneficiaries is typically tax-free. In addition, the employer may be able to deduct a portion of the premium payments.
• Flexible Arrangements: Split-dollar life insurance can be structured in different ways to suit the needs of both parties. For instance, the parties involved can agree on how the premium payments and death benefit will be split.
• Business Continuity: Split-dollar life insurance can be used as a tool for funding a buy-sell agreement between business partners. This can ensure that the business continues in the event of a partner's death.
• Estate Planning: Split-dollar life insurance can be used as a component of estate planning for high-net-worth individuals. It can help to preserve wealth for future generations and offer tax advantages.

It's important to note that the benefits of split-dollar life insurance will depend on the specific circumstances of each arrangement, and the parties involved should seek the advice of legal and financial professionals before entering into a split-dollar agreement.

How much cost of Split-Dollar Plans?

The cost of a split-dollar plan can vary depending on several factors, such as the age and health of the insured, the amount of the death benefit, and the specific terms of the agreement between the parties involved.

Generally, the cost of a split-dollar plan is divided between the employer and the employee, with each party paying a portion of the premium. The employer typically pays the portion of the premium that is equal to the cost of the term insurance, while the employee pays the portion of the premium that is equal to the difference between the cost of the term insurance and the total premium.

In addition to the premium payments, there may be other costs associated with a split-dollar plan, such as legal and administrative fees.

It's important to note that the cost of a split-dollar plan can have tax implications, and the parties involved should seek the advice of legal and financial professionals to ensure that the arrangement is structured in a tax-efficient manner.

In conclusion, split-dollar life insurance is a life insurance arrangement that allows two parties, typically an employer and an employee, to share ownership of a life insurance policy. The policy's premiums and death benefit are divided between the parties according to a pre-agreed formula. Split-dollar plans can provide a variety of benefits, such as enhanced employee benefits, tax advantages, flexible arrangements, business continuity, and estate planning. The cost of a split-dollar plan can vary depending on several factors, and it's important to seek the advice of legal and financial professionals before entering into a split-dollar arrangement to ensure that it is structured in a tax-efficient manner.