Definition of "Leveraged split dollar life insurance"
Modified collateral split dollar life insurance plan under which the employee purchases and owns a life insurance policy on the employee's own life. The employer makes the unscheduled premium payments on the policy. The employee makes a collateral assignment of the policy to the employer, which acts as security for the unscheduled premiums paid by the employer. Upon this assignment, the life insurance company that issued the policy lends the employer the amount of the unscheduled premium payment; interest paid the insurance company by the employer for the loan is tax-deductible to the employer. Part of this interest paid by the employer is credited to the cash value of the policy by the insurance company. During this period of time, the employer is also making the scheduled premium payments due on this policy (at least seven annual premium payments must be made if the policy is to retain its tax-advantaged status). The scheduled premium payments are taxed as ordinary current income to the employee. When the employee retires, the split dollar plan is terminated and all of the unscheduled premium payments made by the employer are repaid to the employer, either through loans on the cash value of the policy or through cash withdrawals from the policy. With the repaid premiums amount, the employer then repays the insurance company for the previous loans made to pay the unscheduled premium payments. The repaid loan amount is credited to the cash value of the policy by the insurance company. From the reconstituted cash values, the employee then borrows a series of annual income payments based on the employee's life expectancy. When the employee dies, the death benefit from the policy repays the amount owed the insurance company for the loans from the cash value made to fund the retirement income of the employee. The excess amount (if any) of the death benefit minus the policy loan repayment is paid to the beneficiary (s) of the employee.
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