A person might be thinking that this is an insurance product. However, it is a way of paying for an insurance policy. In many cases, the cost of insurance could be unaffordable, especially when the coverage is extensive. This is a sure way to make insurance more affordable by sharing the outlay of the policy, or the premium between more than one party. In most cases, it is usually between an employer and employee.
For instance, an employer could wish to give benefits to some employees. For employees who are old, coverage for insurance could be relatively expensive; hence, the company could be willing to pay the cash-value part of the premium, while those employees pay the coverage part only. This is comfortable for the employee, knowing that is family is provided for. In addition, the goal of motivating the employee is achieved. When the covered person dies, benefits of the policy are reimbursed to the company for its premium contributions and the rest goes to the beneficiaries.
This is a sure way of saving money on life insurance, since it does not give space for confusion in relation to the ownership of the policy. There are three main ways on how the split-dollar life insurance is treated.
1. The first one is where the ownership of the policy is in the hands of the insured person. The legal documents in this case will show that a portion of the benefits from holder's death is given to the employer and what is left is disbursed to the respective beneficiaries. If the employee does not work for the company anymore, there is repayment of all contributions from the cash value of the policy and the original agreement is dissolved.
2. The second is the collateral agreement. This is where the employee owns the policy and the employer pays a portion of the premiums. According to this policy, the employer's contribution is treated as a zero-interest loan, which is payable at the death of the employee. The employer is repaid the equivalent of his or her contributions.
3. The third is the endorsement method. The policy is bought by the employer and hence becomes the owner. In this case, the employee is the beneficiary of the policy. However, the distribution of the benefits has a separate agreement.
For these payments, there is no tax exemptions for the premiums paid. The company can howeve, include the premiums as expenses, and can be deducted from pre-tax profits. The final payments and death benefits are both tax-free.
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