Split-Dollar Life Insurance
A split-dollar life insurance policy is a policy where the premiums and the death benefits/cash value are split between two parties. This arrangement is most commonly seen between a business and an employee. A company will pay a portion of the premiums and in return receive a portion of the cash value or death benefit upon the death of the insured. This can work in favor of both parties. The insured pays a smaller premium and in turn can receive a better life insurance policy than they would be able to purchase on their own. This type of policy is also popular among families.
For example, a father will purchase a life insurance policy and split the death benefits with his adult child. This works well for families that own their own business. Since purchasing individual life insurance can be quite costly for small business owners, a split-dollar life insurance can provide a measure of financial protection for those insured as well as a lifeline for the family business should one of the family members die.
Affordable Option For Older Employees
Split-dollar life insurance provides an affordable option for older employees to purchase life insurance. A company will pay a portion of the premiums and in turn receive that portion in death benefits after the employee dies. If a company helps the employee purchase an $100,000 policy and pays $20,000 worth of premiums over the life of the policy, then the company will receive the $20,000 upon the death of the insured employee or the maturity of the policy and the benefactors, or the insured should they out-live the life of the policy, will receive the remaining $80,000. This arrangement can also work in the company’s favor as part of the employee benefits package. It can be used as a tool to attract highly qualified employees while assuming little risk since the premiums paid by the employer would be paid back eventually.
There may be certain tax considerations with a split-dollar life insurance policy. The portion of the premiums paid by the employer on behalf of the employee could be considered a taxable bonus.