Split-dollar Life Insurance

Split-dollar Life Insurance

Split-dollar life insurance is an arrangement between an employer and employee to essentially split the cost and benefits of a life insurance plan. The plan purchased is generally a type of permanent coverage with a cash value element.

Typically, the employer pays the part of the premium that represents the cash value and the employee pays the balance. Upon the employee’s death, the employer is reimbursed for the premiums it paid throughout the life of the policy. The employee’s designated beneficiary gets the rest of the benefits.

Types of Agreements

Split-dollar life insurance arrangements can take many forms, ranging from relatively simple to very complex. Some employers use them as a retention tool for key employees or a select benefit for a co-owner. Others may use it to fund a buy-sell agreement.

This plan can be a versatile option to accomplish various financial goals but keep in mind that the arrangement of a split-dollar life insurance program is complicated and requires legal expertise to complete.

Tax Implications

Neither the employee nor the employer is allowed to deduct premiums paid under a split-dollar arrangement. The employer cannot deduct premiums because it is a direct or indirect beneficiary of the policy. The employee’s premium payment is considered a personal expense, and thus also not deductible.

In addition, the IRS released regulations in 2003 that discussed taxation of a split-dollar life insurance agreement. Taxation of this arrangement depends on whether the employer or the employee owns the policy.

  • If the employee owns the policy, then the employer’s premium payments are treated as loans to the employee for taxation purposes.
  • If the employer is the policy owner, then the employer’s premium payments are considered taxable economic benefits to the employee.

There are many other intricacies with taxation and other rules regarding split-dollar arrangements. Talking to a financial adviser can help you decide which arrangement would be best for you, and how to structure it to ensure compliance with IRS regulations.

Reverse Split-dollar Life Insurance

A variation of split-dollar life insurance is a reverse split-dollar arrangement. In this scenario, the employer and employee still share in the premium payments. Upon the death of the employee, the employee’s beneficiary receives the amount of the employee’s premium payments over the life of the policy, plus interest, while the employer receives the balance of the death benefit.

Employers may use reverse split-dollar insurance arrangements as a type of key-person insurance, to recover from the business repercussions resulting from the death a key employee.

As with typical split-dollar arrangements, neither the employer nor employee can deduct the cost of premiums.

For More Information 

For a better idea of the rates you can expect to pay for life insurance, contact Next Generation Payroll today. Rates for life insurance policies will vary. Women typically pay less than men, due to their longer life expectancy, and rates increase with age. Also, smokers pay more than nonsmokers.Virtual health care is on the rise fast, although that doesn’t change the fact that being fully insured can help lessen the cost of medical services. Reach out to Next Generation Payroll to learn more about how we can make self funded insurance vs fully funded easier for you to access and understand.

Next Generation Payroll is a local black-owned business in Dallas. We are one of the top payroll processing companies for small businesses based in Dallas, TX. Our services are centered around risk management, operational efficiency, and strategies that improve market penetration by helping you generate new business leads. We build up small businesses making sure your business is solvent, and it operates efficiently in all economic climates.

At Next Generation Payroll, we are not interested in fulfilling quotas and meeting monthly sales goals. We focus on goals that are centered around fulfilling our client’s aspirations. Our top priority is to simply provide a strategy to help your business reach full potential. For more information, feel free to reach out to us at 214-396-2200. Stay in touch with us by signing up below for our monthly updates and newsletters



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