Tennessee Insurance Practice Exam

Which plan allows employers to fund an employee's life insurance policy and permits the employee to choose a beneficiary?

1. Group life insurance plan

2. Term life insurance plan

3. Split dollar plan

4. Universal life insurance plan

The correct answer is: Split dollar plan

The split dollar plan is distinct because it involves an arrangement between an employer and an employee where the employer pays a portion of the premiums for a life insurance policy, which is often a permanent policy like whole life or universal life. The key feature is that while the employer contributes to the policy to provide a death benefit, the employee retains control over the policy, including the ability to choose a beneficiary. This structure allows both parties to benefit; the employer can provide a valuable perk, and the employee has the flexibility of designating whom they wish to receive the policy proceeds. Group life insurance typically involves a single policy covering multiple employees, but here, the employer usually holds the policy, and the beneficiaries often default to the employee's estate or specified by the employer rather than being solely chosen by the employee. Term life insurance is a temporary coverage option that does not provide a cash value component and is typically not funded this way. Universal life insurance could be funded by either party, but the critical differentiator in a split dollar plan is the funding arrangement and control over the beneficiary designation.