Policy Ownership


The policy in the split dollar plan may be owned by the employer or by the insured.  Under the most recent IRS rules, the tax treatment of the plan depends on who owns the policy.  In the traditional split dollar plan the employer owns the life insurance policy.  However, the policy may be owned by:


The employer in an endorsement split dollar plan
The insured in a collateral assignment split dollar plan, or
Both the employer and the insured, jointly.

Let's look at each of these approaches.


Endorsement Split Dollar

In the traditional split dollar plan, the policy is owned by the employer who enjoys all of the policyowner rights.  The employer endorses the policy to grant a right to the executive to name a personal beneficiary for any death benefit in excess of the employer's interest.  

The split dollar agreement states:

The premium split between the insured and employer
The death benefit split between the employer and the personal beneficiary
How policy dividends will be applied
Who will own the policy, and
When the split dollar agreement will end

The documents needed in the endorsement split dollar plan, in addition to the insurance application, are:

A board resolution authorizing the plan and the life insurance purchase, and
The split dollar agreement
Endorsement split dollar is typically appropriate when the employer wants to control the policy and its cash values.  It is also indicated when the parties wish to avoid characterization of the employer's premium payments as a loan to the executive.  Clearly, if the intention is to give the executive access to policy cash value, a different approach needs to be employed.

The endorsement split dollar approach is not appropriate in third-party split dollar cases.  In such cases, the concern is one of transfer for value.  In simpler terms, if the employer gives a third party the right to name the beneficiary, a transfer for value may have occurred.  

 Collateral Assignment Split Dollar

A collateral assignment split dollar plan generally gives policy ownership to the insured.  Before the change in IRS rules concerning split dollar taxation, collateral assignment was more popular than the endorsement method.  It is not yet clear, however, which regime will subsequently emerge as the most desirable.   

In collateral assignment split dollar, the policy in the split dollar plan is owned by the insured.  In return for its payment of premiums, the insured policyowner assigns the policy to the employer as collateral.  When the insured dies or the plan terminates by rollout or surrender, the employer recovers its premiums.  The insured (or third party) in a collateral assignment split dollar plan owns the cash values in excess of the employer's collateral interest.

The life insurance policy application in the collateral assignment split dollar plan does not reflect the split-dollar nature of the premium or show any assignment of policy ownership.  The cash value and death benefit split is accomplished entirely by the collateral assignment.

The collateral assignment split dollar agreement states:

The premium split between the insured and employer
The death benefit split between the employer and the personal beneficiary
How policy dividends will be applied
Who will own the policy,and
When the split dollar agreement will end

The documents needed to establish a collateral purchase split dollar plan, in addition to the life insurance application, are:

A board resolution authorizing the plan and the life insurance purchase
The split dollar agreement, and
A collateral assignment form

Collateral assignment split dollar has generally had a broader application than endorsement split dollar, including providing:  

Corporate business owner employee benefits
Additional retirement income
Estate liquidity, and
The insurance funding for cross purchase buy-sell agreements.

As noted earlier, it remains unclear how the IRS tax rules with respect to split dollar plans will affect the relative popularity of these plans.

Split Dollar Rollout

The term "split dollar rollout" refers to the termination of the split dollar agreement and the severance of the employer's interest.  The employer's interest in the policy is satisfied, and the insured or third-party becomes the unencumbered policyowner.  

Rollouts of split dollar plans are usually arranged to repay the employer's premium payments and provide for premium offset at the same time.  The net result may be that the insured executive has little or no subsequent premiums to pay.  If the policy is a whole life insurance policy, the bulk of the funds required to repay the employer's premium interest may come from the surrender of paid-up additions; if it is universal life insurance, the funds often come-at least partly-from cash value withdrawals.   Withdrawals are generally taken to basis, and any additionally required funds may be taken as policy loans.  

The executive usually tries to effect the rollout so that no subsequent premium payments are required.  In the case of universal life insurance, the executive normally leaves cash value in the policy sufficient to pay the monthly deductions.  In the case of whole life insurance, dividends may be sufficient to offset subsequent premiums.   Despite the type of policy involved and just how the rollout takes place, the result is identical: the employer recovers its premium payments, the collateral assignment is lifted and the out-of-pocket premiums may cease.