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How Split Dollar works

Fortunately, basic Split Dollar Supplemental Executive Retirement Plan arrangements are easy to set up, easy to understand, and easy to administer. The life insurance policy can be owned either by your business (Endorsement Split Dollar) or by the employee (Collateral Assignment Split Dollar). Whichever choice is made, the business will own all of the cash value of the policy at all times. This cash value can be accessed directly if the business is the owner of the policy, or through a collateral assignment form if the employee is the policyowner. A third party, such as the employee’s irrevocable life insurance trust, can also own the policy. Under the Split Dollar Supplemental Executive Retirement Plan arrangement, upon the employee’s death, your business will receive a portion of the death benefit equal to the greater of the premiums paid or the cash value of the policy just before the employee’s death. The employee’s beneficiary will receive the remainder of the death proceeds.

Let’s look at an example. You approach one of your key employees and say “Todd, you’re such a valuable employee, we’d like to provide you with no cost life insurance death protection for the benefit of your family. We’ll purchase a life insurance policy on your life and pay all of the premiums. Your family will receive all of the death benefit in excess of the policy cash value. Although there is no direct cost to receive this benefit, the IRS does require that we add a small amount to your taxable income each year representing the value of the death benefit protection.” If Todd is concerned about the wellbeing of his family if he dies prematurely, this is likely to be very attractive to him.