Split dollar life insurance is a unique arrangement that allows businesses and employees to share the costs and benefits of a life insurance policy. However, not all split dollar plans are the same. The two main types of plans—Collateral Assignment Split Dollar and Endorsement Split Dollar—offer different benefits, ownership structures, and levels of control. In this article, we’ll explore each plan in detail to help you understand which option might be right for you.
Collateral Assignment Split Dollar Plan
The Collateral Assignment Split Dollar Plan is structured so that the employee owns the life insurance policy, but the employer pays the premiums. In exchange, the employer is given a collateral interest in the policy’s cash value and death benefit. This means that when the employee dies, the employer is reimbursed for the premiums they have paid, and the remaining benefit goes to the employee’s beneficiaries.
Key Features of Collateral Assignment Plans
- Ownership: The employee owns the policy, giving them control over the cash value as it grows.
- Premium Payments: The employer pays the premiums, with the expectation of being reimbursed upon the employee’s death.
- Control Over Cash Value: The employee has access to the policy’s cash value while alive, which can be used for personal needs or financial planning.
Ideal Use Case
This type of plan is typically used when the employee wants to benefit from the life insurance policy’s cash value while still ensuring that the employer is reimbursed for its investment. It is often chosen by key executives who want more control over the policy.
Endorsement Split Dollar Plan
In contrast, the Endorsement Split Dollar Plan is structured so that the employer owns the policy, while the employee or their beneficiaries receive a portion of the death benefit. The employer retains control over the policy’s cash value and uses the life insurance as an incentive for key employees.
Key Features of Endorsement Plans
- Ownership: The employer owns the policy, retaining full control over the cash value and death benefit.
- Endorsement: The employer endorses a portion of the death benefit to the employee’s beneficiaries.
- No Access to Cash Value: The employee typically does not have access to the policy’s cash value, as it remains under the employer’s control.
Ideal Use Case
Endorsement plans are commonly used as part of an executive compensation package or as a retention tool. Employers favor this structure because it allows them to maintain control over the policy, while still offering a valuable benefit to key employees.
Key Differences Between Collateral Assignment and Endorsement Plans
While both types of split dollar plans allow for shared ownership of a life insurance policy, they differ significantly in structure and purpose:
- Ownership: In the collateral assignment plan, the employee owns the policy, while in the endorsement plan, the employer retains ownership.
- Control: Collateral assignment plans give the employee control over the cash value, while endorsement plans give the employer full control.
- Flexibility: Collateral assignment plans offer more flexibility to the employee, as they can access the policy’s cash value during their lifetime. Endorsement plans, on the other hand, offer more control to the employer.
Choosing the Right Split Dollar Plan
When deciding between a collateral assignment and endorsement split dollar plan, several factors come into play:
- Who Should Own the Policy? If the employee values control over the policy’s cash value, a collateral assignment plan may be the better option. If the employer wants to retain control, an endorsement plan is more appropriate.
- What Is the Goal? If the purpose is to provide a benefit for key employees while keeping control within the business, the endorsement plan may be the best choice. For executives who want flexibility and control over their financial future, the collateral assignment plan is likely a better fit.
In either case, it’s important to consult with a financial advisor or insurance expert to determine the best option based on your specific situation. Call us to get started with a personalized plan.
Frequently Asked Questions
What is the difference between a collateral assignment and an endorsement split dollar plan?
In a collateral assignment split dollar plan, the employee owns the life insurance policy and the employer has a collateral interest. In an endorsement split dollar plan, the employer owns the policy and endorses a portion of the death benefit to the employee’s beneficiaries. The main difference lies in ownership and control over the policy’s cash value.
Who should consider a collateral assignment split dollar plan?
A collateral assignment split dollar plan is ideal for employees who want control over the life insurance policy’s cash value. It allows the employee to access the policy’s cash value during their lifetime, making it a good option for executives who want flexibility in their financial planning.
How does an endorsement split dollar plan benefit employers?
An endorsement split dollar plan benefits employers by allowing them to retain control over the life insurance policy. The employer can use the policy’s cash value, while the employee or their beneficiaries receive the death benefit. This structure is commonly used as part of an executive compensation package or retention tool.
Can a split dollar life insurance plan be used in estate planning?
Yes, split dollar life insurance plans, particularly collateral assignment plans, can be used in estate planning. They allow for the accumulation of cash value that can be accessed during the policyholder’s lifetime, and the death benefit can be structured to benefit heirs, making it a valuable tool for estate planning.
How do I choose between a collateral assignment and endorsement split dollar plan?
Choosing between a collateral assignment and endorsement split dollar plan depends on your goals. If the employee values access to the policy’s cash value and control over the policy, a collateral assignment plan is the best fit. If the employer wants to retain control over the policy and use it as a benefit or retention tool, an endorsement plan may be the better option.
Conclusion
Both collateral assignment and endorsement split dollar plans provide valuable benefits, but they also offer different levels of control and flexibility. Choosing the right plan depends on the specific needs and goals of the employer and employee. If you’re considering a split dollar plan, it’s essential to consult with a financial advisor to ensure you select the plan that aligns with your long-term objectives.
