Curious to know about split dollar life insurance? Want to know if your situation is a strong fit for this type of plan?
Split dollar life insurance is not a common plan for the common consumer. In fact, it’s for a group of people looking to more or less consolidate their insurance efforts into one. It’s an intricate type of insurance plan and it really makes a difference how it’s constructed in the first place.
Life insurance in and of itself can get complex, and when you start a split dollar plan, you’ll see it only gets more in depth.
Here you’ll find a relatively basic layout (as basic as possible, at least) of how a split dollar life insurance plan works, who it’s for, and if it’s something you may want to consider.
Split Dollar Life Insurance Plans
So first of all, let’s discuss what a split dollar plan is from a basic definition standpoint before we talk about its uses and where it’s really applicable and beneficial to its parties.
What is a split dollar life insurance plan anyway?
A split dollar life insurance plan is an arrangement where more than one person is part of a plan to share the overall costs of life insurance. Life insurance can be expensive, especially when there are multiple parties involved and coverage is necessary on many or all of those persons.
It’s called a split dollar plan and not a policy because it’s not just a policy, but also a written agreement among the party to have a structured way to not only split the costs of the insurance, but also of the benefits. Not every plan is an even split among the members, so you can have both minority and majority members.
Not only is the plan for splitting costs and benefits, but in a greater picture beyond the dollars, it’s purpose can be for fringe benefits for employees, advanced estate planning, deferred compensation plans and business continuation plans.
So what does a split dollar plan look like?
One of the easiest ways to explain how a split dollar life insurance plan works is to show you an example of one. There are many different examples and ways of setting a plan up, but the idea here is to show you how the costs and benefits are divided.
If you begin from the top, you can see there is first a written agreement between the employer and employee. This agreement structures the employer as a payer, either full or in part, and the employee as the insured. The employee may also be responsible for some premium but usually a reduced amount.
The premiums are paid to the insurance company just like any normal policy, and the living benefits of the policy are usually restricted to no access, or accessible only to the employer under certain provisions (such as cancellations).
If the insured (the employee) has an untimely death, a portion or all of the death benefit is paid to their named beneficiaries, while some or all of the cash if available to the employer to recoup paid benefit premiums.
The decided payments and benefit percentages received are outlined in the written agreement before the policy is placed in force, and typically cannot be altered unless there is a termination in the benefit itself. In the event of other exit provisions, alternative exit strategies may be placed within the written agreement.
In summation, an employer and employee agree to split costs and/or benefits utilizing a life insurance policy, which can benefit both the business and the employee or his family.
It Sounds Like There Could Be Legal And Tax Ramifications, Yes?
Sure thing. There are so many ways of setting this type of plan up, a split dollar life insurance agreement can have many different aspects in both the tax and legal arenas.
Because there can be different types of ownership and the premiums can be staged as both tax deductible or non-tax deductible, standard tax laws may or may not apply. Depending on what benefits are being sought in the long term, and even what type of life insurance policy is being purchased, the benefits at the maturation of the policy can vary greatly.
In addition, because there are multiple parties involved and there must be a properly constructed agreement which is legal and durable, a legal professional will need to be utilized.
If you or someone you know is considering a split dollar life insurance plan, we’d be happy to assist you. Contact us today and we’ll stay with you through the entire process of setting up and placing your insurance plan. We’ll be happy to work with your tax and legal professionals, or help you find assistance if needed.