Example: An employer wishes to participate in a conventional split-dollar life insurance plan as an employee benefit to a key person. The employer pays all or part of the premiums. The insured employee is taxed on the economic value of the insurance protection.
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, taxed as ordinary income, minus the employer's costs.
Split-dollar rollouts
Split-dollar planning provides considerable flexibility. Under a split-dollar rollout, for example, the corporation pays the start-up costs of the coverage, with the insured taking over full ownership and premium payment responsibility at a later date. At that time, the corporation can use a policy loan to recover its costs, and then transfer all policy rights to the insured. A transfer to the insured is an exception to the transfer-for-value rule.
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