Two split-dollar ownership methods

Two basic methods of split-dollar policy ownership are used:

• Non-equity split-dollar
• Split-dollar as a loan

Under the non-equity split-dollar method, one party — usually the employer — pays most of the premium, owns the cash value during the insured's lifetime, and is fully reimbursed from the proceeds at the insured's death. The other party — usually an employee or shareholder/employee — pays the balance of the premiums and names a beneficiary, who receives the remainder of the death proceeds.

Under split-dollar as a loan, the employee owns the policy. The employer's interest is secured by a split-dollar collateral assignment giving the employer the right to make policy loans without notifying the employee, and providing that interest on such loans is payable by the employer.

• If the insured dies or surrenders the policy, the employer claims its interest in the policy under the terms of assignment.
• The balance of the death proceeds goes to the insured's beneficiary.
• The balance of any cash values goes to the policyholder if the policy is surrendered.

The IRS treats collaterally assigned split-dollar arrangements as below-market loans of the premiums to the employer.

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