Split-dollar life insurance is an insurance arrangement that is becoming increasingly popular among employers and employees alike. This article will explore the concept of split-dollar life insurance and its various aspects, including its benefits, drawbacks, and tax implications.
What is Split-Dollar Life Insurance?
Split-dollar life insurance is a type of life insurance arrangement in which two parties are. Typically an employer and an employee, share the cost and benefits of a life insurance policy. Under this arrangement, the employer and the employee enter into a contract that outlines the terms and conditions of the policy, including the premium payments and the death benefit.
How Does Split-Dollar Life Insurance Work?
Under a split-dollar life insurance arrangement, the employer and the employee agree to split the premium payments and the death benefit of the policy. The employer may pay a portion or all of the premiums, while the employee may pay the remainder.
When the insured person dies, the death benefit is paid to the beneficiary designated in the policy. The beneficiary may be the employee, the employer, or a third party.
Benefits of Split-Dollar Life Insurance
Split-dollar life insurance offers several benefits to both employers and employees. Some of the key benefits of split-dollar life insurance include the following:
Employee Benefits
- Life insurance coverage at a reduced cost: Since the employer and the employee share the cost of the premium. The employee may be able to obtain life insurance coverage at a lower cost than if they were to purchase the policy on their own.
- Portability: The employee may be able to retain the policy even if they leave the employer.
- Tax advantages: The employee may be able to exclude a portion of the death benefit from their taxable income.
Employer Benefits
- Attract and retain key employees: Split-dollar life insurance can be used as a tool to attract and retain key employees by providing them with valuable employee benefits.
- Tax advantages: The employer may be able to deduct a portion of the premium payments as a business expense.
Drawbacks of Split-Dollar Life Insurance
While split-dollar life insurance offers several benefits, it also has some drawbacks. Some of the key drawbacks of split-dollar life insurance include the following:
Employee Drawbacks
- Potential tax liability: If the employee receives a portion of the premium payments or the death benefit, they may be subject to income tax on that amount.
- Loss of control: Since the employer and the employee share the policy. The employee may have less control over the policy than if they were to purchase it on their own.
Employer Drawbacks
- Accounting and administrative costs: The employer may incur accounting and administrative charges associated with setting up and maintaining the split-dollar life insurance arrangement.
- Legal and regulatory compliance: The employer may be subject to legal and regulatory requirements related to split-dollar life insurance arrangements.
Tax Implications of Split-Dollar Life Insurance
Split-dollar life insurance has several tax implications for both employers and employees. Some of the key tax implications of split-dollar life insurance include the following:
Employee Tax Implications
- Income tax: The employee may be subject to income tax on the economic benefit they receive from the policy, such as the portion of the premium payments or the death benefit that they receive.
- Estate tax: The death benefit may be included in the employee’s estate for estate tax purposes.
Employer Tax Implications
- Deductibility of premium payments: The employer may be able to deduct a portion of the premium payments as a business expense.
- Taxable income: The employer may be subject to income tax on the economic benefit they receive from the policy, such as the increase in the cash surrender value of the policy.
Conclusion
Split-dollar life insurance is a complex insurance arrangement that can offer several benefits to both employers and employees. However, it also has drawbacks and tax implications that need to be carefully considered before entering into a split-dollar life insurance arrangement. Employers and employees should consult with their tax and legal advisors to determine if split-dollar life insurance is a suitable option for their specific circumstances.
