Split Dollar
A split dollar arrangement is a method of purchasing life insurance. In a split dollar arrancement, the premium payments, policy benefits or both are divided in some predetermined way - often between a business and an employee, but sometimes between two individuals or between an individual and a trust.
The premium payments and policy benefits are split between the parties in a manner specified in a split dollar agreement between them. Split dollar arrangements are usually designed to terminate at a specified futute date, such as the employee's retirement or death of the insured.
There are two different types of split dollar arrangements.
1. Collateral Assignment Method
2. Endorsement Method
In the collateral assignment method, the employee owns the policy and names a beneficiary, but assigns policy benefits to the employer as collateral for the employer's premium advances under the arrangement. A third party may be the policy owner. This ownership is often used for estate planning purposes.
In the endorsement method, the employer owns the policy and an agreement spells out the employee's rights. The agreement gives the employee the right to name the beneficiary for his or her share of the death proceeds. At the employee's death, the life insurance can be split in any way the parties agree to.