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By Investopedia AAA

Taxation and Business Uses of Insurance - Split-Dollar Life Insurance

In many instances it is beneficial to a business or corporation to help an employee purchase life insurance. The policy can be used as an incentive or as a form of deferred compensation. A split-dollar life insurance policy can be beneficial to both the employer and the employee.

Definition
It is an arrangement between two parties, usually an employer and employee in which they share and split the policy. The policy can be shared and split in several ways...

  • Cash values
  • Premiums
  • Death Benefits
  • Ownership
  • Dividends

Advantages
A spit-dollar arrangement can benefit both interested parties. Overall the advantages of the arrangement to the employer are...
  • The employer can provide low cost benefits to it's employees
  • The portion of the premiums paid by the employer for the benefit of the employee can be deducted for tax purposes by the employer
  • The employer will receive the total of all premiums paid on behalf of the employee upon the employee's death
  • The plan can be designed so that the employer retains complete flexibility. In other words, the employer can modify or terminate the arrangement at their option.
  • The arrangement can be used as an incentive to the employee

The advantages to the employee are...
  • Able to obtain life insurance cheaper. In other words, splitting the cost of the premiums allows employees to obtain better coverage at less cost.
  • The employee can protect his/her family in the event of their untimely death
  • When an employer pays the premiums the employee may be able to reduce their income tax liability (if the employee is in a higher tax bracket).
  • Can provide for estate liquidity in the event of the employees death
Structure and Taxation of Split-Dollar Coverage

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