How Do Split-Dollar Life Insurance Plans Work?

A split-dollar plan can lower the cost of life insurance.

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Split-dollar life insurance plans are not a type of life insurance policy. Instead, it's a contract that outlines how a life insurance policy will be shared and managed between two or more people.

Plans can be used with survivorship life insurance, permanent, and whole life insurance policies that have cash values. Common provisions covered in a split-dollar plan are who pays the policy premiums and how the benefits are paid or shared.

For instance, plans may require two or more people to divide the cost of the life insurance policy, where each pays a portion of the premium. The same provision may be made when assigning beneficiaries to restrict or grant access to cash values.

There are several types of split-dollar life insurance plans, including those:

  • Between employer and employee
  • For owners of companies
  • Between shareholders and corporations
  • Between individuals

Individual plans are sometimes called private split-dollar life insurance plans and exist among family members or in an Irrevocable Life Insurance Trust.

However, the most common split-dollar life insurance plan is between an employer and an employee and that is the focus of this article.

How Does a Split-Dollar Plan Work?

Employee benefits packages commonly offer split-dollar life insurance plans. Employers provide them as an employment perk to better retain high-value employees. By offering to pay part of the cost of the life insurance policy, the employer provides a good benefit to their employees.

A split-dollar plan starts with the employer and the employee signing a contract. While contract details can vary, every plan will outline how much each person will pay toward the life insurance premium and who is eligible to cash in on the benefits of the policy.

What Are the Agreement Terms?

The terms of the split-dollar life insurance plan will cover all aspects of the policy payments, cash benefits, and payouts. The agreement is a legal document that should comply with applicable local, state, and federal laws and tax regulations.

Among other considerations, the agreement should include:

  • The total cost of the life insurance premium and how much the employer and employee each agree to pay.
  • Who is entitled to the various death benefit and cash values.
  • Conditions the employee must meet to remain eligible for the plan such as performance objectives and attendance requirements.
  • When the plan takes effect and how long the plan will last.
  • How the plan may be terminated or changed.

What Happens If You Change Jobs?

The terms of a split-dollar plan often revolve around an employer and employee relationship. When an agreement is made, the conditions and provisions at the start of employment or during contract negotiations provide for what happens at the termination of employment.

The split-dollar life insurance plan should be seen as an employee benefit. The employer isn't likely to continue sharing the cost of a life insurance policy after your employment has ended, whether it was voluntary or not.

You may have the option to maintain the plan at your cost but that depends on the insurance provider and terms of your policy.

Benefits of a Split-Dollar Insurance Plan

There are several advantages to sharing the cost of life insurance with a split-dollar plan. Depending on the type of agreement, benefits could include:

  • Low-cost life insurance: Sharing the cost of insurance gives you a low-cost option for life insurance. Some plans may even be "employer pay all" where corporate dollars pay for the entire plan.
  • Avoid insurability issues: Having the life insurance policy may protect you from becoming uninsurable in the future if you get sick while you are insured on the plan.
  • Future premium savings: You may experience savings on future life insurance when you maintain a policy. Insurance premiums can be based on the rate for the age you were when you originally bought insurance rather than the age when you retire or leave employment.
  • Access to cash: If the split-dollar plan allows, you may have access to cash values or the ability to borrow from the policy.
  • Tax benefits: Split-dollar plans can minimize gift and estate taxes, as well as other potential tax benefits, depending on how your plan is written.

Split-dollar life insurance plans can have many benefits. However, the flexibility and vast range of options that could be written into the agreements can make them difficult to understand.

Plans should always be written up and reviewed by a qualified professional, such as an attorney, to ensure they adhere to legal requirements and protect your interests. Seek the advice of tax attorneys, licensed insurance representatives, and/or a financial planner if you need help determining the implications for your situation.