Is split-dollar life insurance worth it?


The terms of split-dollar life insurance agreements can be complex, so work with a licensed insurance professional to understand what you’re getting into and ensure you get the most out of it. But first, understand the nuances, benefits and drawbacks of this type of insurance offering.

What is split-dollar life insurance?

Split-dollar life insurance is a contract between two or more people that allows a life insurance policy to be used as an asset or employee benefit. The most common agreement is between an employer and employee, but these plans can also be shared between co-owners of a business, shareholders and a corporation, a family member and the family’s trust or between any two individuals.

How does split-dollar life insurance work?

A contract is created to specify how the premium costs will be split, how the benefits are shared, the death benefit and any cash value the life insurance policy may accrue.
If the agreement is between an employer and employee, this might be part of an employee benefits package, and sometimes the employer carries all or most of the cost. The agreement should include what happens to the policy if you change jobs or are laid off by the company.

Do split-dollar arrangements apply to all life insurance policies?

Yes. You can use a split-dollar life insurance contract for any type of policy, including:

  • Term life insurance
  • Whole life insurance
  • Universal life insurance
  • Survivorship life insurance

How do split-dollar premiums and payments work?

There are three standard types of split-dollar plans that determine how the premiums are paid.

  • Classic split-dollar. In this arrangement, the employee pays the larger principle part of the premium and the employer pays the part of the premium that goes to cash value. If the employee dies, the beneficiaries get the death benefit and the employer gets the accumulated cash surrender value.
  • Equity split-dollar. The employee pays an annual contribution that costs roughly the same as a term life insurance policy. The employer pays the rest, and in return either gets the cash value of the policy or a return of the premium paid when the employee dies, whichever is less. Any excess cash value is added to the death benefit and passed on to the beneficiaries of the policy.
  • Reverse split-dollar. With this plan, the employer pays the term life portion and the employee covers the rest. During the policy, the employee has access to its cash value and policy loans. When the employee dies, the employee’s beneficiary gets the cash surrender value of the policy, leaving the death benefit and all funds beyond that to the employer.

    This arrangement also allows the employee to take over the policy if they ever leave the company, which also means the employee takes over paying the full premium and gets the full benefit and cash value for the beneficiaries.

What can split-dollar life insurance be used for?

How the insurance is used depends on the wording of the agreement and how it’s structured. There are five common uses for a split-dollar plan:

  • Endorsement. The policy is owned and paid for by the employer, and the employee pays taxes on the benefits.
  • Collateral assignment. The employer owns the policy and pays the premiums, but the payments are considered a loan to the employee, which has to be paid back when the employee resigns, or can be written off by both the employee and employer as a tax deduction.
  • Estate planning. If your policy is owned by an outside interest, such as a trust or annuity, you don’t have to pay estate or income taxes on the death benefit. A private split-dollar arrangement can be used to purchase the life insurance policy outside the estate with an agreement to pay the premiums back later.
  • An asset in a buy-sell agreement. You can use a split-dollar life insurance plan as an asset to fund a buy-sell agreement, or a business will, as it’s sometimes called. The partners in a business become the shared owners and assigned beneficiaries of the policy after the insured partner dies.
  • Cross endorsements. As another way to fund a buy-sell agreement, a cross endorsement plan allows one partner in the agreement to take out a life insurance policy on their own behalf. But ownership of the policy is split among all of the partners in the agreement, as are the premiums and benefits.

What are the benefits of split-dollar life insurance?

Despite the complexities, there’s a lot to be gained by entering into a split-dollar life insurance plan:

  • Save on taxes. Depending on the type of split-dollar plan, you may be protecting your beneficiaries from having to pay estate or income taxes on the benefits they receive from the plan.
  • Lower costs. Because the plan distributes the premium as well as the benefits, you may be able to afford life insurance that you wouldn’t be able to otherwise. Under some agreements, your employer may even foot the entire bill.
  • Lasting coverage. If you make sure you can take your plan with you, you won’t have to worry about proving insurability to get a new plan in the future.
  • Corporations can target select employees.In this type of agreement, an employer can choose to offer this type of added benefit to select employees, like a key employee.

What to watch out for

  • Income taxes. If your plan isn’t structured to avoid it, you may have to pay income taxes on the economic benefits you get from your employer paying part or all of the premiums.
  • Interest or more taxes. The collateral assignment type of split-dollar plan can mean not only paying your employer back for the premiums but also paying interest on top of that. If you don’t, you’ll have to claim those premiums as income on your taxes.
  • Complex and barely regulated. While there are some IRS rules in place that apply to split-dollar plans, you don’t have protections from laws like the Employee Retirement Income Security Act (ERISA) or the standards that these regulations dictate.

When do split-dollar life insurance plans end?

How a split-dollar plan terminates depends on the agreement you made. Typically, the agreement ends when the employee dies, retires or fulfills the terms of the agreement. The benefits are divided as specified in the plan, and either the beneficiaries are paid, or the policy ownership is released to the employee.

If the employee dies prematurely, leaves the company or otherwise terminates the agreement before the terms have been fulfilled, the employer is typically reimbursed for the premiums paid out of any cash surrender value. But early termination should be specified within the agreement and is determined by which type of split-dollar life insurance plan you have.

Is split-dollar life insurance worth it?

A split-dollar plan can be a good way to get more life insurance coverage than you could get on your own. For employers, it can be a way to retain talented employees who may be less likely to leave with this kind of employee benefit. But it’s important to craft your agreement well to avoid taxes and interest that could negate the benefits of the plan.

Which companies offer split-dollar life insurance?

Quite a few insurance companies offer split-dollar plans, including:

  • Lincoln Financial. Offers employer plans, as well as non-equity collateral family plans, private plans and corporate plans.
  • John Hancock. Offers private plans, survivorship policies between spouses and plans that can be used for buy-sell funding. John Hancock also allows their split-dollar plans to be structured to transfer equity to an owner.
  • Allstate. Offers employer plans, private non-equity plans and private switch dollar plans for equity collateral assignment.
  • Nationwide. Offers collateral assignment and endorsement split-dollar plans for employers.

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Bottom line

Split-dollar life insurance has an assortment of uses and may be a fit for you as an employee benefit or asset. But if you’d rather find a policy that comes with fewer restrictions and stays in your control, compare other types of life insurance options to find one better suited to you.

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