Structure
Typically, there are two types of split-dollar arrangements.
Endorsement Method - Employer owns the policy and pays the premiums on the policy.

  • Employer will receive the total of all premiums paid if the cash value is surrendered or proceeds are paid as the primary beneficiary and then pays the remaining balance to the employee's secondary beneficiaries.
  • Employee is not a shareholder

Collateral Assignment Method - Employee owns the policy and the corporation loans its share of the premium payments to the employee.
  • Employer hold the policy as collateral
  • Employer will receive the total of all premiums paid if the cash value is surrendered or proceeds are paid to the employee's beneficiaries. The primary beneficiary is the employees' choice it is not the business or corporation.
  • Employee is a shareholder

Tax Considerations
As with any arrangement between an employer and employee both parties need to consider the tax consequences of the arrangement. With split-dollar coverage there are tax advantages and disadvantages for the employer and employee. The following table illustrates the major tax considerations.
Employer Employee
Premiums Paid Non-Deductible Non-Deductible and must report the benefit received for income tax purposes (employer paid premiums). The reportable amount is computed using Table 2001 (may be referred to as P.S. 58)
Death Benefits Received Tax Free - Unless paid to a C Corporation. The benefits are includable in calculating the AMT amounts Tax Free
Estate Tax N/A No incidents of ownership - not includable in gross estate. Incidents of ownership - includable in gross estate

Practice Question:
Janet works at ABC Corporation. She would like to purchase life insurance and make her husband the beneficiary of the policy. She is not a shareholder in the corporation. The corporation does allow employees to purchase life insurance under a split-dollar arrangement. Which type of arrangement should Janet choose and who will be the primary beneficiary of the policy?

A. Endorsement Method; Janet (herself)
B. Endorsement Method; Janet's husband
C. Endorsement Method; ABC Corporation
D. Collateral Assignment Method; Janet's husband
E. Collateral Assignment Method; ABC Corporation

Answer: C
Janet is not a shareholder in the corporation; therefore making it more beneficial for her and the corporation to use the endorsement method. Janet's husband would not be the primary beneficiary of the policy, ABC Corporation is the primary. Upon Janet's death ABC receives the benefits and retains the total of the premiums paid, then passes the remaining balance to Janet's husband. Under the collateral assignment method Janet's husband is the primary beneficiary and must give the corporation the remaining balance on the loan amount (total premiums paid).


Business Overhead Expense Insurance

Related Articles
  1. Personal Finance

    How Private Split-dollar Life Insurance Works

    Understand how a private split-dollar life insurance plan can help leverage gifts and reduce estate taxes.
  2. Financial Advisor

    Life Insurance Plans to Help Your Small Business Retain Employees

    How to use and design cash value life insurance plans as an incentive to help attract and retain key employees.
  3. Markets

    Split Dollar Life Insurance: How it Works

    Understanding how split dollar life insurance plans are designed and what tax regulations they must follow.
  4. Personal Finance

    Who is a Beneficiary?

    A beneficiary is a person or entity that receives funds, assets, property or other benefits from a trust, will, or life insurance policy.
  5. Financial Advisor

    How to Handle Client Beneficiary Designations

    Beneficiary designations are a critical financial planning step that can be easily overlooked. Here's how to ensure they are properly done.
  6. Managing Wealth

    Will Insurance Keep Your Business Safe?

    Skilled employees are key to a successful business. Find out how to avoid a financial setback if they leave.
  7. Retirement

    Understanding Life Insurance Premiums

    When buying permanent life insurance, what amount of premium should you pay for the coverage?
  8. Retirement

    6 Benefits You're Required by Law to Offer Your Employees

    Learn about the benefits that a business must offer to employees, such as family and medical leave, as well as various forms of insurance coverage.
  9. Retirement

    Life Insurance: How To Get the Most Out Of Your Policy

    There are many benefits to owning a life insurance policy - if you get the right one for you.
  10. Personal Finance

    Explaining Corporate Tax

    A corporate tax is a tax levied on the profits a corporation generates.
Trading Center