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Split Dollar Life Insurance: Best Plans and Sample Rates

split dollar life insurance guideOccasionally as a business owner, or high-level executive, you may need a large life insurance policy issued on behalf of your company.

This is because to the business, you are an extremely valuable asset. Which means that if something were to happen to you, the company would need to hire someone in order to replace you. On top of that, you would need some sort of coverage to keep your family financially safe.

Split dollar life insurance is a type of policy that offers an affordable life insurance solution to both employers and employees.

We created this guide to help both employers and employees understand:

Let’s start by answering this question a bit more in depth:

What Is Split Dollar Life Insurance?

Split dollar life insurance is a mutually beneficial life insurance contract which uses an agreement between an owner and a non-owner to share the cost of the life insurance. It’s sort of a win-win between two parties, typically an employer and employee.

How Does Split Dollar Life Insurance Work?

Split dollar life insurance is technically an agreement between two individuals or a company and an individual. There is an owner of the policy and a non-owner.

Usually, a unique agreement is made by both parties, explaining how the policy is structured between them. Split dollar life insurance agreements usually include information such as:

    • Premiums
    • Cash value
    • Death benefits
    • Ownership

Split dollar arrangements span a wide range of policy types, making it possible to get whole life insurance, term life insurance, universal life insurance, and survivorship life insurance. 

Not sure what any of this means? No worries, we have comprehensive guides to help you learn more about these types of life insurance:

How Do Split Dollar Life Insurance Premiums and Payouts Work?

There are three primary ways split dollar life insurance premiums are paid and pay out:

    • Classic Split Dollar
    • Equity Split Dollar
    • Reverse Split Dollar

Classic Split Dollar

With a classic split-dollar plan, the employer pays some of the premium (the part that is equal to cash value), while the employee pays the rest. If the employees dies, or the plan is terminated, the surrender cash value is paid to the company, and the death benefits are paid out to beneficiaries.

Equity Split Dollar

In an equity split dollar arrangement, the employee’s annual premiums are equal to the cost of pure term life coverage. The remaining premium is paid by the employer.

In the event that a policy is terminated or the insured employee dies, the employer receives the policy’s cash value, or the total amount of premiums paid to date, whichever amounts to less. Any excess cash value more than the employer’s premiums paid in is paid out to the insured’s beneficiaries with the death benefit.

Reverse Split Dollar

Reverse split-dollar policies require the employer contributes to the term life portion of the policy, while the employee is responsible for the cash value part of the premium. If the employee dies, the surrender cash value of the policy is paid out to the insured’s beneficiaries, and the rest is paid out to the company.

If this policy is terminated while the employee is still alive, they can elect to take the cash value, or to keep the policy in force. This requires them to handle all future premiums, leaving the employer with nothing.

What Can Split Dollar Life Insurance Be Used For?

There are a few major ways that split dollar life insurance policies are used by employers and employees:

    • Endorsements
    • Collateral Assignment
    • Estate Planning
    • Funding Buy-Sell Agreements
    • Cross Endorsements

Depending on which policy you choose, and what your agreement determines, your policy may work differently. Let’s elaborate a bit more on how split dollar life insurance works in each of these situations:

1. Endorsement Split Dollar

With an endorsement split dollar policy, the employer owns the policy and premiums are paid by the employer. This is usually used in the form of a taxable economic benefit for the employee.

2. Collateral Assignment

Collateral assignment split dollar policies are owned by the employer and they contribute to the premium payments. However, these contributions are classified as loans to the employee, and either must be paid back after resignation, or can be written off as tax deductions by employers and employees.  

3. Estate Planning

There are also private split dollar arrangements that can exist outside of the employer-employee relationship. Estates typically use split dollar arrangements to minimize estate taxes. A split dollar life insurance strategy can negate the tax burden of gifting an estate.

4. Funding A Buy-Sell Agreement

Another way a split dollar life insurance plan might be best for you is to fund a buy-sell agreement. These types of policies can be used to fund the agreement, or as collateral in case of default on their portion of the company.

5. Cross Endorsements

In a cross endorsement buy-sell agreement, split dollar life insurance policies are taken out by a partial owner on behalf of themselves, and agreed to pay out to each of the remaining business owners in the event of their death. The other members then agree to pay a portion of the premiums over the life of the policy, as this goes towards the value of the policyholder’s equity. When they die, this policy is used to payout the remaining shares to the remaining members, in exchange for them paying up the rest of the policy.

2 Types of Split Dollar Life Insurance Policies

There are two main methods that can be used to create split dollar policies:

    • Endorsement Split Dollar
    • Collateral Assignment Split Dollar

Endorsement Split Dollar

This allows employers to easily pay for employee benefits packages in bulk, which can help reduce rates and improve the benefits themselves. Endorsement split dollar policies are also referred to as an economic benefit regime.

In this type of policy, the employer owns the life insurance policy and the employee is named as the beneficiary to the policy. The employer typically pays the premiums, but not always. With this type of policy, when an employee leaves or is terminated, the policy can easily be transferred to their replacement.

Collateral Assignment Split Dollar

Collateral assignment split dollar is also referred to as a loan regime. In this type of policy, the employee owns the policy and can name its beneficiaries.

This type of policy is especially made for executives, and key role employees. In this case, the company loans money to the employee in order for them to pay for a large insurance policy they otherwise could not afford.

In the event that the policy is paid out, the amount of money loaned to the employee to purchase the policy is returned to the business and the rest is paid out to the employee’s beneficiaries.

What Are the Advantages of Split Dollar Life Insurance?

One of the best parts about split dollar life insurance policies is that they help both employers and employees at the same time. Let’s examine some of the benefits they can have for both parties:

Employer Advantages

Employee Advantages

Selectivity

Companies get to decide whether an individual employee or group of employees get different benefits.

Meaningful Benefits

Employees receive Insurance protection at the time when they likely need it most.

Easy

Creating a split dollar policy does not require any IRS approval and the administration necessary to complete the process is quite minimal.

Cost-effective and Tax-effective

Employers are generally the ones paying the full premium so the employee is taxed only on their share of the death benefit and that tax is a much more attractive, term amount.

Business Asset

The split dollar policy cash values  are assets according to company balance sheets and that cash value growth still maintains its tax-deferred basis.

Tax-free Death Benefits

If the death benefit is paid out the proceeds are considered income for the beneficiaries and it is tax-free.

Employee Performance Tool

Key employees will naturally be more productive especially if the deferred compensation benefit is only given to them upon meeting certain metrics or standards. This tool functions as a very strong incentive to perform well.

Versatile

These arrangements provide financial protection but they can also be used to help with estate planning or supplement retirement needs. There is a great deal of versatility.

How Much Does Split Dollar Life Insurance Cost?

The cost will differ for people and employers based on the amount of coverage taken out, any deferred compensation that the employer wants to combine with the split dollar policy, the cash value growth, and of course the same impacts that affect life insurance such as health and age.

In order to get personalized sample rates for split dollar life insurance, it is best that you speak with an independent agent with your employer.

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Best Split Dollar Life Insurance Companies

When it comes to finding the best split dollar life insurance policies, a few companies really stand out from the pack:

Lincoln Financial

  • Lincoln Financial provides cost-efficient ways to create split dollar arrangements for employers and employees
  • They offer private non-equity collateral assignments between family members
  • There are private switch dollar  plans available
  • Businesses can establish corporate non-equity collateral assignment split dollar plan or endorsement split dollar plan

John Hancock

  • John Hancock offers endorsement split dollar plans which can continue to use economic benefit regime plans
  • There are private switch dollar options which combine the advantages of a loan regime and an economic benefit
  • There are collateral assignment split dollar plans available which can be a survivorship policy for an individual and a spouse as well.
  • Policies can be structured to transfer Equity to an owner
  • There are endorsement split dollar policies that can be used specifically as a buy-sell funding tool with John Hancock

Allstate

  • Allstate provides private non-equity arrangements for those who have cash flow to fund a large Insurance need but they want to minimize gift taxes.
  • They offer private switch dollar plans for equity collateral assignment
  • There are corporate split dollar arrangements that have non-equity collateral assignments between businesses and employees available

Other FAQ About Split Dollar Life Insurance

what is split dollar life insurance and how does it work

At JRC Insurance Group, we have helped hundreds employers and key employees insure themselves and their businesses on the road to success. During our experiences, we have been asked a few questions more than others:

Q. Who pays the premiums in a split dollar plan?

The person who pays for the premiums is based on the type whether it is an endorsement or a collateral assignment. With the endorsement policies the premiums are paid by the employer. In the collateral assignment policies the premiums are paid by the employee by way of loans from the employer.

Q. Is a split dollar plan a qualified plan?

A split dollar plan is a non-qualified plan.

Q. What is endorsement split dollar?

The endorsement split dollar plan is one that is owned by the employer. The premiums are paid by the employer and the beneficiary is listed as the employee. This is a policy where at the end of the arrangement, which is typically the point at which the employee leaves their position, the policy is transferred to the employee so that they still have a life insurance policy without having to apply for and take out a new one.

Setting Up A Split Dollar Life Insurance Policy

Whether you are the founder of the company, and executive, a key employee, or just an employee, a split dollar life insurance policy has many benefits.

If you are interested in learning more about split dollar life insurance policies and how to set one up, please contact us today.

At JRC Insurance Group, we work with over 50 of the Best Life Insurance Companies on the market. We have helped thousands of clients find the exact right policy for them, and have helped hundreds of business owners set up split dollar life insurance policies.

It’s time to give back to your employees, and receive tax benefits for it. Give one of our experienced independent life insurance agents a call today at 855-247-9555 to talk more about setting up a split dollar life insurance policy for your company.

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Cliff Pendell

VP of Marketing at JRC Insurance Group
Cliff is a Managing Partner and Co-Founder at JRC. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.
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