insurance

Split Dollar Life Insurance

A life insurance arrangement where two parties (typically an employer and employee) share the premiums, cash value, and death benefits of a permanent life insurance policy. The arrangement allows both parties to benefit from the policy while splitting the costs and rewards according to a predetermined agreement.

Example

“The company offered a split dollar life insurance arrangement where they would pay 80% of the premiums in exchange for 80% of the cash value, while the employee retained full control of naming beneficiaries.”

Memory Tip

Think 'split the dollar' - two parties literally split both the costs and benefits of the life insurance policy like sharing the cost of a dollar.

Why It Matters

Split dollar arrangements can provide employees access to life insurance coverage they might not otherwise afford while giving employers a way to retain key employees. However, tax law changes have made these arrangements more complex and potentially less attractive than they once were.

Common Misconception

Many people think split dollar life insurance is always a good deal for employees, but the tax implications can be significant. The employee may owe taxes on the economic benefit they receive from the employer's premium payments, which can make the arrangement costly.

In Practice

Consider a $500,000 policy with annual premiums of $8,000. Under a split dollar arrangement, the employer pays $6,400 (80%) while the employee pays $1,600 (20%). If the policy builds $15,000 in cash value over five years, the employer would be entitled to $12,000 and the employee $3,000. However, the employee may owe annual taxes on the economic benefit of the employer's premium contributions, which could amount to several hundred dollars per year depending on their age and the policy terms.

Etymology

The term originated in the 1960s from the concept of 'splitting' or dividing the costs and benefits of a life insurance policy between two parties, similar to how a dollar might be split between two people.

Common Misspellings

split doller life insurancesplit-dollar life insurencesplit dolar life insurancesplit dollar live insurance

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