Definition
Split Dollar Life Insurance is an arrangement where a permanent life insurance policy’s premiums, ownership rights, and death benefit proceeds are shared between two parties, typically an employer and an employee or a parent and a child. This type of policy can leverage tax advantages, offer financial security, and incentivize retention or loyalty.
In such agreements, the employer generally pays the portion of the annual premium that corresponds to the increase in the policy’s cash value, and sometimes the employer covers the entire premium. Upon the death of the insured, the policy beneficiary appointed by the employee receives part of the death benefit, while the rest is paid back to the employer to recover premiums paid.
Examples
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Employer-Employee Arrangement: An employer takes out a split-dollar life insurance policy on a key employee. The employer pays the premiums and is reimbursed from the policy’s cash value or death benefit. The employee’s beneficiary receives the balance of the death benefit.
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Parent-Child Arrangement: A parent establishes a split-dollar life insurance policy in which the parent pays the premiums. Upon the parent’s passing, the death benefit is split between a beneficiary selected by the child and the reimbursement of premiums to the parent’s estate.
Frequently Asked Questions
What is the advantage of a Split Dollar Life Insurance policy?
The main advantage is its cost-sharing aspect, allowing the benefits of life insurance to be extended to employees at a lower cost. It also may offer tax advantages and incentivize key employees to stay with the employer.
Who owns the split-dollar life insurance policy?
Ownership usually depends on the structure of the split-dollar agreement. It can be jointly held by both parties, or the ownership rights can reside with either the employer or the employee, depending on the agreement terms.
Can the terms of a split-dollar life insurance agreement be modified?
Yes, the terms can generally be modified, but any changes should comply with IRS regulations and be documented in writing to maintain clarity.
How is the death benefit divided in a split-dollar life insurance policy?
Typically, the death benefit is split according to the agreement, where the employer is reimbursed for their premium contributions, and the remaining benefit goes to the employee’s designated beneficiary.
Are there different types of split-dollar agreements?
Yes, there are primarily two types: the endorsement method (owner retains ownership) and the collateral assignment method (employee owns the policy but assigns the right to the cash value back to the employer).
- Cash Value Life Insurance: A component of permanent life insurance policies where a portion of premiums goes into a cash value account that grows over time.
- Death Benefit: The amount paid out to the beneficiary upon the death of the insured.
- Premium: The regular payment made to an insurance company to keep the policy active.
- Beneficiary: The person or entity designated to receive the death benefit from a life insurance policy.
Online References
Suggested Books for Further Study
- “Insurance and Risk Management: The Complete Guide” by Richard H. Hrab.
- “Life Insurance: A Consumer’s Handbook” by Joseph M. Belth.
- “Risk Management and Insurance” by Scott E. Harrington and Gregory R. Niehaus.
Fundamentals of Split Dollar Life Insurance: Insurance Basics Quiz
### What is a primary characteristic of a split-dollar life insurance policy?
- [ ] Policy owned exclusively by the employer.
- [x] Sharing of premiums, ownership rights, and death proceeds.
- [ ] Beneficiary is always the employer.
- [ ] It is a type of term life insurance.
> **Explanation:** A split-dollar life insurance policy involves sharing premiums, ownership rights, and death benefit proceeds between two parties, commonly an employer and an employee.
### Who typically pays the premium in a split-dollar life insurance arrangement?
- [ ] The employee only.
- [x] The employer, at least for the part equal to the cash value increase.
- [ ] The beneficiary.
- [ ] The insurance company.
> **Explanation:** In a split-dollar life insurance arrangement, the employer typically pays the portion of the premium that relates to the increase in cash value, and sometimes covers the entire premium.
### What happens to the death benefit in a split-dollar arrangement upon the insured's death?
- [x] It is split between the beneficiary and the employer.
- [ ] It is only paid to the employer.
- [ ] It is only paid to the employee's beneficiary.
- [ ] It is returned to the insurance company.
> **Explanation:** Upon the death of the insured, the death benefit is split between the designated beneficiary and the employer to reimburse their contributions.
### Which IRS document pertains to the regulation of split-dollar life insurance arrangements?
- [x] IRS Guidelines on Split Dollar Insurance Arrangements
- [ ] Social Security Benefits Guide
- [ ] Medicare and Medicaid Handbook
- [ ] Employee Benefits Planning Guide
> **Explanation:** The IRS provides specific guidelines regarding the use and regulation of split-dollar life insurance arrangements.
### What is an advantage of a split-dollar life insurance policy for employers?
- [ ] It involves no financial contribution from the employer.
- [x] It provides benefits at a reduced cost and incentivizes employee retention.
- [ ] It avoids all tax responsibilities.
- [ ] It guarantees higher profits for the employer.
> **Explanation:** Split-dollar life insurance policies are advantageous for employers as they provide valuable benefits to employees at reduced costs and encourage employee retention.
### Are there different types of split-dollar life insurance agreements?
- [x] Yes, such as endorsement method and collateral assignment method.
- [ ] No, all agreements are the same.
- [ ] Only one standard method is recognized.
- [ ] None, split-dollar life insurance is a single, standardized policy.
> **Explanation:** There are different types of split-dollar agreements, including endorsement methods and collateral assignment methods.
### Who benefits from a split-dollar life insurance policy?
- [x] Both employer and employee/beneficiary
- [ ] Only the employee
- [ ] Only the employer
- [ ] The employer receives all benefits
> **Explanation:** Both the employer and the employee/beneficiary benefit from a split-dollar life insurance policy by sharing premium costs and death proceeds.
### What concept does a split-dollar life insurance policy leverage?
- [ ] Short-term investment goals
- [x] Cost-sharing between two parties
- [ ] Individual tax exemptions
- [ ] Employer sole ownership
> **Explanation:** A split-dollar life insurance policy leverages cost-sharing between two parties, allowing shared premiums and benefits.
### Can terms of a split-dollar life insurance policy be modified?
- [x] Yes, with compliance to IRS regulations and proper documentation.
- [ ] No, terms remain constant.
- [ ] Terms can be modified only once.
- [ ] Terms can never be modified once set.
> **Explanation:** Terms of a split-dollar life insurance policy can be modified if they comply with IRS regulations and are properly documented.
### Which method involves the employee owning the policy but assigning cash value rights to the employer?
- [x] Collateral assignment method
- [ ] Endorsement method
- [ ] Full ownership method
- [ ] Dividend assignment method
> **Explanation:** The collateral assignment method involves the employee owning the policy while assigning rights to the cash value to the employer.
Thank you for exploring the detailed aspects and benefits of Split Dollar Life Insurance and tackling our challenging sample exam quiz questions. Keep pursuing knowledge in insurance policies and financial strategies!
