Business Insurance: Split Dollar Life Insurance

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Generally, the term "split dollar life insurance arrangement" refers to any arrangement between an owner of a life insurance contract and a non-owner under which:

  • Either party pays all or part of the premiums,

  • One of the parties paying the premiums is entitled (conditionally or unconditionally) to recover some portion of those premiums, and

  • The premium recovery is made from or secured by the contract's proceeds (e.g., the death benefit)

In compensatory arrangements, a special rule applies. Any arrangement between an owner and a non-owner of an insurance contract is considered a split dollar arrangement if:

  • The employer (or other service recipient) pays, directly or indirectly, all or any portion of the premiums, and

  • The beneficiary of all or a portion of the death benefit is designated by the employee (or other service provider) or is any person whom the employee would reasonably be expected to name as beneficiary, or the employee has an interest in the cash value of the policy

This special rule also applies to arrangements between a corporation and a shareholder. Group term life insurance arrangements are excluded from the definition.

Generally, under the regulations, the owner of a contract is the person named as the policyowner. If two or more persons are named as policyowners and each has an undivided interest in every right and benefit under the contract, these persons are treated as owners of separate contracts. In other cases, the first-named person is treated as the owner of the entire contract.

An exception to this general rule applies when the only benefit available under the arrangement to an employee or service provider (in an arrangement entered into in connection with the performance of services) or a donee (e.g., a life insurance trust) is the value of the current life insurance protection. In such a case (i.e., a so-called non-equity arrangement), the employer (or service recipient) or the donor is treated as the owner of the policy, regardless of the general rule.

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