Split-dollar is a way to buy insurance, not a reason to buy it. Under a split-dollar agreement, someone who needs life insurance but can't afford it is helped by someone who has the means and incentive to pay part of the premiums.

Prior IRS approval is not required, and the employer may select participants.

Conventional split-dollar arrangements

There are a variety of ways of splitting the premiums and death benefits in a conventional split-dollar situation. In each case, the insured receives a taxable economic benefit from the employer's premium contribution, equal to either the annual cost of one-year term life insurance, minus his or her own contribution, if any, or imputed interest income applying applicable federal interest rates to the cumulative premiums paid. The amount of this benefit may be determined using the government's Table 2001 rates or the insurance company's actual one-year term rates, if lower.

The employee's beneficiary receives the death proceeds tax-free. The employer recovers its costs. If the policy is terminated, the employee receives the balance of the cash values, minus the employer's contributions.

Here's a review of more common premium-splitting arrangements.

• Traditional split-dollar — The employer pays the portion of the premium equal to the annual cash value increase; the insured pays the balance.
• Employer-pay-all arrangement — The employer pays the full annual premium; the insured employee pays nothing except the income tax on the economic benefit each year.
• Employee pays economic benefit — The insured employee pays just enough of the premium to offset his or her taxable economic benefit; the employer pays the rest.
• Employer bonus arrangements — Under a single-bonus plan, the insured receives a bonus each year in the amount of the one-year term cost; the insured pays income tax on the economic benefit.

Under a double-bonus plan, the employer pays the insured the one-year term cost plus the amount of the tax on the economic benefit as an annual bonus. The employee's cost under this arrangement is zero.

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