A split-dollar arrangement is a strategy in which a life insurance policy's premium, cash
values, and/or death benefits are split between two parties (owner and non-owner). It
is not a type of life insurance or a reason for buying life insurance; rather, it is a method
of financing the purchase of life insurance. Split-dollar is generally most appropriate
when one party (the company) has the cash to pay the premiums for life insurance
and the other party (the employee) has the need for life insurance. Depending upon
the method of split dollar used, the policy owner may be the employer, the insured/
employee, and the insured's trust or a third party.
There are two common forms of structuring the ownership of a split-dollar insurance arrangement: endorsement or collateral assignment. When an endorsement split-dollar arrangement is used in a business context the employer typically pays the premiums on a life insurance policy on the life of the employee.
A Split-Dollar Insurance Agreement (Endorsement Method) is an arrangement between two parties (such as an employer and employee) to share the costs and benefits of a life insurance policy. The employer pays for the premiums, but the employee owns the policy and is the beneficiary. The employer and employee agree on how the premiums, death benefits, and other policy benefits will be divided between them. This arrangement is also known as "endorsement split-dollar." The two main types of endorsement split-dollar arrangements are the "economic benefit" method and the "loan" method. In the economic benefit method, the employer pays the premiums and the employee gets the policy benefits. The loan method involves the employer loaning money to the employee, who must then repay the loan with interest. Split-dollar insurance agreements can provide a number of benefits to both parties, such as tax savings, estate planning flexibility, and the ability to share the cost of life insurance. However, these arrangements can be difficult to set up and require careful consideration of the applicable tax laws.
