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Breaking Down Employer/Employee Split-Dollar Arrangements

dollar.jpgYou're starting a new job. Amongst all the on-boarding paperwork, health insurance plans, and payment packages, there's an unfamiliar document: a split-dollar life insurance agreement. Most people know that life insurance is an important estate-planning tool, but they may not know the ins and outs of a split-dollar insurance plan.

Today, we break down the different types of split-dollar agreements and what they do.  

What does a split-dollar agreement do?

Although split-dollar plans can exist between private individuals, the most common arrangements are between an employer and an employee. The employee enters into a written agreement with his/her/their employer outlining how they will divide the costs and benefits of the insurance plan.

The agreement also includes expectations for the employee, such as performance metrics they are expected to meet in their job.

Under IRS rules established in 2003, two types of employer/employee agreements are available:

Economic benefit

In the economic benefit arrangement, your employer owns the life insurance policy and pays the premium. Then, they assign certain rights to you, such as the ability to designate a beneficiary. One of the benefits of this arrangement is its straightforward nature.

However, the employee in an economic benefit arrangement must pay taxes on the "economic benefit" they receive from the policy.

Loan

In a loan arrangement split-dollar plan, the employee owns the policy - but the employer still pays the premium. This arrangement gets its name from the fact that payments made by the employer are viewed as a loan. In return, the employee gives an interest in the policy back to their employer. In most cases, this interest is a decision-making power.

Planning for your financial needs

A life insurance policy plays an important role in any estate plan. To learn more about how you can benefit from a split-arrangement plan, consult an experienced estate planning attorney.

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