Sample Provisions: Split Dollar Insurance Agreement

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EDITOR’S NOTE: Split dollar insurance is a useful tool for obtaining permanent life insurance (i.e., generally not term life) on the life of an owner or key employee at a cost that is shared jointly by both parties. The following provisions are designed to assist practitioners in drafting or reviewing a split dollar life insurance agreement.

SPLIT DOLLAR INSURANCE AGREEMENT

THIS AGREEMENT, made as of __, ___, between _____, an ___ corporation, (the “Company”) and _____, as Co-Trustees (collectively the “Trustee”) of the ___ Irrevocable Insurance Trust U/A/D/ ____;

WITNESSETH:

WHEREAS, the Trustee is the owner of two (2) policies of insurance, issued by the _____ INSURANCE COMPANY (the “Insurer”), on the life of ____ (the “Insured”), being (a) Policy No. __, in the face amount of _____ ____ Dollars ($__), and (b) Policy No. ___, in the face amount of _____ ($___), (which two policies are herein referred to collectively as the “Policies” and singly as the “Policy”); and

WHEREAS, the Company and the Trustee have agreed upon a plan for the payment of the premiums due or to become due on the Policies and for the mode of payment of death benefits thereunder; and

WHEREAS, for the protection of their mutual interests, the parties desire and intend to state all their agreements relating thereto herein.

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, it is mutually agreed by and between the parties as follows:

1. Ownership of Policies:

The Trustee shall be the sole and absolute owner of the Policies, and may exercise all ownership rights granted to the owner by the terms of the Policies.

2. Payment of Premiums and Interest; Policy Loans:

Premiums on the Policies shall be paid when due while the Policies and this Agreement remain in force, as follows:

(a)  the Trustee shall cause the premiums to be billed to it;

(b)  premiums and interest on the Policies shall be payable annually or more frequently, as the Trustee may elect;

(c)  each premium due on a Policy and any interest due on policy loans shall be paid by the Trustee from amounts contributed by the parties as follows:

(i)  an amount to be contributed by the Trustee during each policy’s year (less any dividend application elected by the Trustee) equal to the lower of (A) the annual cost of current life insurance protection on the life of the Insured under such Policy, based on uniform one year term insurance premiums for life insurance protection as determined in P.S. Number 58, or (B) the yearly renewable term rate of the Insurer for policies on the life of the Insured for the face amount of this Policy;

(ii)  an amount to be contributed by the Trustee equal to the interest on all policy loans (if any) made by the Trustee; and

(iii)  an amount to be contributed by the Company during each Policy’s year (all of which contributions are collectively the “Company Payments”) equalling the difference, if any, between the amount of the Trustee’s contribution [as described in subparagraph (i) of this paragraph] and the total premium and interest on outstanding policy loan (if any) for such Policy’s year.

As of the creation of this Agreement, there is an outstanding policy loan. To the extent that the Company repays that loan during the term of this Agreement, such principal repayment(s) shall become and be considered as a part of the Company Payments herein.

3. No Interest Charged:

The Company Payments contributed pursuant to the provisions of Paragraph 2(c)(iii) hereinabove shall constitute interest-free investments by the company to the Trustee which the Trustee shall be obligated to repay to the Company as stated hereinbelow.

4. Assignment of Rights to Company:

To secure repayment of the Company’s Payments, the Trustee shall assign an interest in each Policy to the Company as collateral, which assignment shall give the Company the following (non-ownership) rights:

(a)  the right to receive a portion of the proceeds of such Policy upon the death of the Insured, as provided in Paragraph 6 hereinbelow; and

(b)  the right to receive a portion of the interpolated terminal reserve value of such Policy in the event that Policy is surrendered or cancelled by the Trustee pursuant to the provisions of Paragraph 8 herein below.

The foregoing assignment of rights shall be subject to all of the terms and conditions of the Policies and to all superior liens, if any, which the Insurer may have against the Policies.

The Policies shall be delivered to the Company to hold for purposes of this Agreement.

5. Promissory Note as Security:

If the Company so requests, after each premium payment, if the gross cash surrender value of either Policy is less than the cumulative total of (a) all of the Company’s Payments with respect to such Policy less (b) the total of all amounts repaid to the Company with respect to such Policy, (the result of which is hereinafter referred to as the “Company’s Net Entitlement”), the Trustee shall make a non-negotiable interest-free demand note payable to the Company in an amount equal to the difference between the Company’s Net Entitlement and the then current gross cash value of such Policy immediately after such premium payment, and the Company shall cancel any previous note or notes. Further, such note shall be reduced or cancelled if and to the extent that:

(a)  the Trustee pays the Company any part or all of the principal balance of such note; and/or

(b)  upon surrender of the Policy by the Trustee or upon processing of a claim for death benefits under the Policy by the beneficiary, the Company shall receive payment of part or all of the principal balance of such note.

6. Designation of Beneficiaries:

While this Agreement remains in effect, the Trustee agrees to designate the Company and the Trustee, as their interests herein appear, as the beneficiaries of the Policies, so that upon the death of the Insured, the proceeds of the Policies will be payable in two parts as follows:

(a)  a lump sum to the Company of an amount equal to the Company’s Net Entitlement; and

(b)  the balance of the proceeds as the Trustee elects.

Upon request and without unreasonable delay, the Company shall deliver either or both Policies to the Trustee in order that the Trustee may make any change of beneficiary or any election of an optional mode of settlement desired with respect to that portion of the proceeds referred to in subparagraph (b) of this Paragraph 6.

7. Proceeds Upon Death of Insured:

Upon the death of the Insured while either Policy and this Agreement shall be in force, each party shall promptly take all necessary steps, including rendering such assistance as may reasonably be required by the other party, to obtain payment from the Insurer of the amounts payable under such Policy (Policies) as provided in Paragraph 6 hereinabove.

The Insurer is authorized to recognize the claims of the beneficiaries to proceeds hereunder without investigating the reason for any action taken by such beneficiaries, the validity or the amount of any liabilities between the parties or the existence of any default therein, the giving of any notice, or the application to be made by any beneficiary of any amounts to be paid by the Insurer. Written receipt of the beneficiaries for any sums received shall constitute a full discharge and release to the Insurer.

8. Surrender or Cancellation of Policies:

The Trustee, at all times, shall have the sole right to surrender or cancel either or both Policies for the interpolated terminal reserve value thereof, in accordance with the terms hereof. Upon request of the Trustee, the Company shall deliver the Policy or Policies to the Trustee for this purpose. The Trustee and the Company agree that, on any such surrender or cancellation, the Insurer may pay to the Trustee the full interpolated terminal reserve value without seeing to the Company’s repayment under this Agreement; whereafter, the Trustee shall promptly transmit to the Company that portion of the interpolated terminal reserve value of the Policies equal to the Company’s Net Entitlement. Written receipt of the Trustee for any sums received shall constitute a full discharge and release to the Insurer.

9. Termination of Agreement:

This Agreement shall terminate with respect to each Policy upon performance of the terms of this Agreement after the first to occur of any of the following events:

(a)  surrender or cancellation of such Policy by the Trustee;

(b)  the death of the Insured;

(c)  failure by the Company or the Trustee for any reason to make the contribution due toward any premiums payable on such Policy;

(d)  termination of the Insured’s employment with the Company; or

(e)  written notice by either of the Company or the Trustee to the other stating that this Agreement is terminated.

Upon occurrence of (c), (d) or (e) above, the Trustee shall have forty-five (45) days to remit to the Company an amount equal to the Company’s Net Entitlement.

10. General Provisions:

(a)  Upon termination of this Agreement pursuant to the provisions of Paragraph 9 hereinabove with respect to a Policy, the Company shall release the collateral assignment of the Policy made to it.

(b)  In the event that either party to this Agreement shall pay some portion of the premiums or interest due by the other party, such amount or amounts shall become part of the amount due and owing to the party making such payment (or its beneficiary).

(c)  This Agreement may not be amended or modified except by written instrument signed by the parties thereto.

(d)  All previous agreements between the parties hereto with reference to either Policy are superseded by this Agreement.

(e)  This Agreement shall be binding upon the parties hereto and their successors, assigns, heirs, executors and administrators and beneficiaries.

(f)  The Trustee, after written notice to the Company, shall have the right to assign all or any part of its interest in this Agreement, and/or either Policy (including any and all of the Trustee’s ownership rights in such Policy) to such other person, persons, entity or entities as the Trustee may designate. Any successor or assignee of the Trustee shall succeed to all of the rights, privileges, duties and obligations of the Trustee as set forth herein.

(g)  It is the intention of the Parties that the Trustee assign to the Company those rights listed in Paragraph 4 hereinabove without assigning to the Company any incidents of ownership in the Policies as defined under Section 2042 of the Internal Revenue Code of 1986 as amended (and Regulations thereunder, presently in effect, or any successor thereto). It is agreed by and between the parties that all provisions of this Agreement shall be construed, and all rights, powers and duties exercised, so as to accomplish this result.

(h)  This Agreement shall be subject to and construed according to the laws of the state of __.

IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written.

                                 __________________ Irrevocable Insurance
                                 Trust U/A/D________________________
    
                                 ____________________________________
                                            Trustee
    
                                 ____________________________________
                                            Trustee
    
                                 ____________________________________
                                            (``Company'')
    
                                 By ________________________________
    
                                 As its ______________________________
    

***

ASSIGNMENT OF LIFE INSURANCE POLICY AS COLLATERAL

A. For Value Received, ___ and _____, as Co-Trustees (collectively the “Trustee”) of the ____ Irrevocable Insurance Trust _____, hereby assign, transfer, and set over to _____ INC., an __ corporation (the “Company”), the following specific rights in and to Policies No. _____ issued by _____ LIFE INSURANCE COMPANY (the “Insurer”), and any supplementary contracts issued in connection therewith (said policies and contracts being hereinafter collectively referred to as the “Policies” and individually as the “Policy”) upon the life of ____ (hereinafter referred to as the “insured”), subject to all terms and conditions of the Policies and to all superior liens, if any, which the Insurer may have against the Policies. The Trustee and the Company by this instrument agree to the conditions and provisions herein set forth.

B. It is expressly agreed that the Company’s only interest in each of the Policies shall be limited to the right to receive a portion of the proceeds of such Policy due because of the death of the Insured or the surrender or cancellation of such Policy, such portion to be equal to the total amount paid by the Company to the Insurer or to the Trustee to (a) pay Policy premiums, plus (b) any amounts the Company paid to the Insurer to repay policy loans existing upon the date of creation of this assignment, reduced by (c) any amounts repaid to the Company as of the date of the Insured’s death or date of surrender or cancellation of such Policy.

C. Without detracting from the generality of the rights retained by the Trustee, it is expressly agreed that the following specific rights are reserved to the Trustee with respect to each Policy and excluded from this assignment:

1.  the right to cancel or surrender such Policy;

2.  the right to collect and receive all distributions or shares of surplus, dividends or additions to the such Policy now or hereafter made or apportioned thereto, and to exercise any and all options contained in such Policy with respect thereto;

3.  the right to borrow against the cash value of such Policy;

4.  the right to designate and change the beneficiary;

5.  the right to elect any optional modes of settlement permitted by such Policy or allowed by the Insurer;

6.  the right to receive policy dividends, or to apply them toward the payment of premiums, policy loan repayments or interest on policy loans; and

7.  the right to cancel or surrender such Policy and the right to transfer the ownership rights in such Policy by absolute assignment subject to the Company’s rights as collateral assignee;

but the reservation of these rights by the Trustee shall in no way impair the right of the Company to be repaid as hereinabove stated in B, and any designation or change of beneficiary or election of a mode of settlement made by the Trustee is subject to the Company’s right to be repaid.

D. This assignment is made and each Policy is to be held as collateral security for any and all sums heretofore or hereinafter paid by the Company with respect to a certain Split-Dollar Insurance Agreement between the Company and the Insured dated ___, ___.

E. The Company shall have physical possession of the Policies. It covenants and agrees with the Trustee that it, upon request of the Trustee or its absolute assignees, will forward either or both Policies to the Insurer (if required by the Insurer) for the exercise of any right reserved by the Trustee including the right to surrender such Policy(ies) for cancellation.

F. The Insurer shall be fully discharged as to each Policy by payment of the death benefits thereunder to the named beneficiary(ies) as provided by the terms of such Policy.

G. The Insurer shall be fully protected in recognizing a request for cancellation of a Policy by the Trustee without investigating the reasons therefor, and upon delivery and surrender of such Policy to the Insurer, it shall terminate such Policy. The sole receipt of the Trustee for any sums received shall be a full discharge and release therefor to the Insurer.

H. In the event of any conflict between the provisions of this assignment and any other evidence of any liability, with respect to either Policy or right of collateral security therein, the provisions of this assignment shall prevail.

I. The Trustee declares that no proceedings in bankruptcy are pending against the subject trust and that the subject trust property is not subject to any assignment for the benefit of creditors.

Signed and Sealed this _ day of __, ___.

                                 __________________ Irrevocable Insurance
                                 Trust U/A/D_____________________________
                                 ________________________________________
                                 Trustee
                                 ________________________________________
                                 Trustee
    
                                 ___________________________________ Inc.
                                 By _____________________________________
                                 As its _________________________________
    ACKNOWLEDGEMENT:
    ____________________ Life
    Insurance Company
    By ____________________
    As its ________________11

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