Have you ever heard of the term “split dollar life insurance?” Well, it is not the most common term.
Though if you’re shopping around for life insurance policies, it is a term you should get familiar with. So what is split dollar life insurance?
Split-Dollar Life Insurance
The split-dollar life insurance is not another type of life insurance policy. In fact, it is a contract that summarizes how a life insurance policy should be shared and managed. This is applicable to those insurance policies that have two or more beneficiaries.
It covers who pays for the policy premiums and how the benefits will be paid or shared. Usually, this contract can be used with different types of life insurance. This includes permanent life, survivorship, and whole life. Oftentimes, these insurance policies have cash values.
Types of Split-Dollar Life Insurance Plans
Now, there are different types of split-dollar life insurance plans. Each plan differs in contract. Check them out below:
- Employer and Employee split-dollar life insurance – this is the most common type.
- Between individuals – this is also referred to as a private split-dollar life insurance plan. It is often used by family members.
- Between shareholders and corporations
- For owners of businesses and companies
How Split-Dollar Life Insurance Works
So, how does it work? Let’s take the most common type of split-dollar life insurance plan for instance. Usually, employees are offered some sort of life insurance as a part of their benefit package.
Companies and employers who offer life insurance benefits attract high-value employees. This is where employers pay part of the insurance policy premium to provide good benefits for their employers.
This insurance plan varies from person to person. However, each one will show how much a person will pay toward the life insurance premium. It will also state who will be eligible to cash in on the policy’s benefits.
The agreement must be in line with applicable local, state and federal laws and tax regulations. It should also include the conditions that the employee must meet in order to remain eligible for the plan. Moreover, it should state when the plan becomes effective, how long it lasts, and how it may be terminated or changed.