The Split Dollar Advantage
Many insurance and financial service professionals recommend using a split-dollar
program, funded with insurance products, as a creative way for people to pay for life
insurance with their employer's help.
A split-dollar agreement benefits both the employee and the employer. The employee
receives permanent (not term) life insurance at a reduced cost, (as opposed to purchasing
his or her own policy separately) gaining financial security for his or her survivors and
providing liquidity for the executor of his or her estate. At the same time, the employer
can recruit and retain key employees by offering an attractive fringe benefit. Plus, the
employer can eventually recover the premiums the business pays for the insurance.
So how does it work? While there are several variations of this concept, common
characteristics of these programs are:
 | Premium payments are split between the employer and employee. |
| If the employee dies or terminates employment, the employer is entitled to receive an amount equal to the premiums paid by the company. |
| When the agreement is terminated, the employee remains owner of the policy and names a beneficiary. |
What are the tax consequences? The
employee reports the economic benefit (the value of the pure life insurance protection)
plus the value of other policy benefits received (such as the cash value accruing to the
owner of the contract in collateral assignment programs), less any premium he or she pays,
as income. The employer's premium payments are not tax-deductible. Beneficiaries receive
death benefits income-tax free.
What's the catch? There isn't any. Employees get inexpensive life insurance coverage and
employers eventually get back every penny they pay for the policy. A properly designed
split-dollar program funded with insurance products can be a big plus for your business.
