Life Insurance Split Dollar Agreement: What it is and How it Works
When it comes to life insurance, there are many different types of policies and agreement options available, including a life insurance split dollar agreement. This type of agreement is often used in business contexts, but it can also be used in personal estate planning.
So, what is a life insurance split dollar agreement? Simply put, it is an arrangement between two parties to share the costs and benefits of a life insurance policy. One party typically pays the premiums, while the other party receives the death benefit proceeds.
In a typical split dollar agreement, the employer pays the premium costs for a life insurance policy on the life of an employee. The employee is the insured and is typically responsible for naming the beneficiary. Upon the employee’s death, the death benefit proceeds are paid to the employee’s beneficiary.
However, the employee may also choose to assign a portion of the death benefit proceeds to the employer to help recover some of the premium costs. This is where the “split” in the split dollar agreement comes from.
There are a variety of ways to structure a split dollar agreement, and different tax rules and regulations may apply depending on the specifics of the agreement. For example, if the employer owns the life insurance policy and pays the premiums, the employee may be taxed on the value of the premiums paid by the employer.
Alternatively, if the employee owns the policy and assigns a portion of the death benefit proceeds to the employer, the employer may be taxed on the premiums paid and any portion of the death benefit that exceeds the premium cost. It is important to work with a knowledgeable attorney or tax advisor to ensure that your split dollar agreement is structured in a way that meets your objectives and complies with applicable laws.
Some potential benefits of a life insurance split dollar agreement include:
1. Reduced out-of-pocket costs for the employee: By having the employer pay the premiums on the policy, the employee may be able to obtain a larger amount of coverage than they could otherwise afford.
2. Estate planning advantages: By assigning a portion of the death benefit proceeds to the employer, the employee may be able to reduce their taxable estate while still providing for their loved ones.
3. Recruitment and retention benefits for employers: Offering a split dollar arrangement as part of a benefits package can be an attractive incentive for employees.
Overall, a life insurance split dollar agreement can be a useful tool for both employers and employees who want to provide life insurance coverage while also managing costs and taxes. As with any financial arrangement, it is important to carefully consider the specifics of the agreement and seek guidance from a professional advisor to ensure that the arrangement meets your needs and objectives.