In a split-dollar life insurance arrangement between an employer and a key employee, which statement best describes how the plan works?

Why A is correct

A split-dollar arrangement is a method of financing and allocating a permanent life insurance policy between an employer and an employee (or between a corporation and a shareholder). The parties agree to split the premium payments and, in turn, split the benefits: the employer typically receives an amount equal to its premium contribution (often tied to the policy's cash value), and the employee's designated beneficiary receives the remaining death benefit. The policy is usually owned by the employee with the employer named as beneficiary to the extent of its interest, or a collateral assignment is used.

Why the other options are wrong

• B) If the employer took the entire death benefit and paid all premiums, the plan would serve no employee-family purpose; split dollar is designed to allocate benefits between both parties.
• C) Split dollar does not require two separate policies; it uses a single permanent policy with the benefits and costs divided by agreement.
• D) Split dollar is not primarily a loan arrangement; it is a premium and benefit-sharing plan. (Some plans use an economic-benefit or loan approach to value the employer's interest, but the defining feature is the split.)

Memory hook

Split dollar = one permanent policy, two piggy banks: employer recovers its cost, family keeps the rest.