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Split Dollar Life Insurance

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Think of split-dollar life insurance as a win-win strategy between two parties.

Split-dollar, when properly set up, is a mutually beneficial arrangement in which an owner and non-owner split and share a life insurance contract.

Here, you will find a definitive guide to the strategy, including how and when it works, the tax implications, merits and obstacles, and what your next steps should be.

What Is Split Dollar Life Insurance?

It’s difficult to describe in a single sentence, because there are a lot of moving parts, but we’ll try.

Technically it’s a legal arrangement between an owner and non-owner of a life insurance contract that communicates how the policy is shared and split.

Split-dollar life insurance is not a type of life insurance – it is a method of utilizing life insurance.

The arrangement outlines how a life insurance policy is structured between the parties in order for the contract to be mutually beneficial.

Shared and split policy components include:

  1. Premiums
  2. Cash-value
  3. Death benefit
  4. Ownership

Types of life insurance utilized for split-dollar arrangements:

  • Whole life insurance
  • Universal life insurance
  • Survivorship life insurance

Keep in mind – before establishing the arrangement, a need for life insurance must exist.

How Split Dollar Life Insurance Works

The goal of split-dollar life insurance is often to reward and retain high-value employees.

There are two methods for how the strategy is established:

1. Endorsement Split Dollar

  • Also called an Economic Benefit Regime.
  • Employer owns the life insurance policy.
  • Employee can name a beneficiary to the policy.
  • Employee’s rights to the policy are filed with the insurer under an endorsement.

The employer usually makes premium payments.

If the arrangement ends (let’s say the employee leaves their job), the employer usually transfers the life insurance policy to the employee.

In the event of the employee’s death, typically the employer receives a return of premium and/or the cash value of the policy.

In turn, the employee’s beneficiary usually receives the remaining policy proceeds.

2. Collateral Assignment Split Dollar

  • Also called a Loan Regime.
  • Employee (or a third party, such as an Irrevocable Life Insurance Trust, ILIT) owns the life insurance policy.
  • Employee can name a beneficiary to the policy.
  • Employee assigns rights to the policy (rights will vary) to the employer as collateral.

The employer typically loans money to the employee to make premium payments.

The employee often has the option to continue the policy upon the termination of the agreement.

Should the employee pass away, the named beneficiary will receive a tax-advantaged death benefit.

Employers’ accrued expenses are often paid back via the cash value of the policy.

AspectEndorsementCollateral Assignment
RegimeEconomic BenefitLoan
Policy OwnerEmployerEmployee
PremiumsPaid by employerPaid by employee via loans from employer
BeneficiaryEmployee lists beneficiaryEmployee lists beneficiary

Taxation Of Split Dollar Life Insurance

Split-dollar arrangements became popular in the 1960s, and historically, they had favorable tax treatment.

However, on September 17, 2003, the U.S. Department of the Treasury and the IRS updated the rules and regulations surrounding these arrangements.

The regulations provide tax rules that reflect the underlying economics of split-dollar life insurance arrangements. Under these rules, companies cannot use split-dollar life insurance arrangements to provide tax-free compensation to their executives. – U.S. Department of the Treasury

We will focus on tax implications for arrangements entered on or after this date. Older agreements are subject to previous tax regulations.

Because split dollar arrangements vary, tax implications differ.

In other words, taxation is dependent on the set up of the arrangement.

Policy ownership determines the taxation of a split-dollar arrangement.

Here, we will look at the two mutually exclusive forms and how they are taxed.

Endorsement Split Dollar Tax Implications

Taxed under the Economic Benefit Regime.

Keep in mind, the employer owns the life insurance policy.

The premium payments made by the employer to the life insurance policy are considered a taxable economic benefit to the employee.

Specifically, the economic benefit pertains to the death benefit and the employee’s interest in the cash-value component of the policy. Every tax year, the economic benefit is measured.

On the other hand, if the employee makes premium payments that are equivalent to the policy’s value, the employee is not subject to income tax on the policy.

Collateral Assignment Split Dollar Tax Implications

Taxed under the Loan Regime

Remember, the employee (executive) owns the life insurance policy.

The employer’s contributions to the premium payments are classified as loans to the employee. Interestingly, every premium payment is classified as a separate loan.

In turn, the employee is taxed on the difference between the market-rate interest and the actual interest rate of the loans.

Important – Split-dollar life insurance accounting is complicated. Consult with your tax advisor for split-dollar life insurance W2 reporting.

Note – Similar tax rules apply for private split-dollar arrangements between individuals (or an individual and a trust).

Classifications Of Split Dollar Plans


In a non-equity arrangement, the employee does not receive “equity” in the life insurance policy. The employer only provides life insurance protection, but no interest in the cash value of the policy.


In an equity split-dollar arrangement, the employee has “equity” in the cash value of the life insurance policy. The employer’s stake in the cash-value is typically restricted to the cumulative of premiums paid.

Split Dollar Life Insurance For Estate Planning

In addition to split-dollar plans between an employer and employee, private split-dollar arrangements also exist.

Particularly, estates regularly utilize private split-dollar arrangements.

Let’s say, for example, you have a large estate and are looking for a strategy to minimize estate taxes.

Pertaining to estate planning, if a life insurance policy’s premium amount is more than the gift tax exclusion, a gift tax results.

However, a split-dollar life insurance strategy can negate the gift tax burden.

Irrevocable Life Insurance Trust – ILIT

An Irrevocable Life Insurance Trust (ILIT) houses a life insurance policy. Rather than you, the ILIT is the owner of your life insurance policy.

You avoid estate tax liabilities because the ILIT allows your life insurance policy to be separate from your estate.

Keep in mind, an ILIT is irrevocable. Once in place, you do not have the option of transferring policy ownership back to you.

Establish private split-dollar arrangements with care to ensure a sound tax strategy surrounding your estate.

Other Uses

The two most common uses for split-dollar are to retain and reward key employees and for estate planning.

However, there are other uses.

Family Retention of Business

Split-dollar is one method of funding a one-way buy-sell agreement – between a business owner and a key employee, often the “heir apparent” (i.e. family member).

Shareholders and Corporations

Depending on the corporation classification, tax implications vary. However, as an example, corporations can establish cross-endorsement buy-sell agreements via split-dollar.


Employer and employees alike are able to enjoy the benefits of a split-dollar arrangement.


  • Attract and retain high-value employees.
  • Ability to specifically choose employees to offer arrangement to (not subject to ERISA regulations).
  • Low out-of-pocket expenses.
  • Arrangement can be modified.
  • Effective in maintaining family retention of a business.


  • Provides needed life insurance protection.
  • Reduced out-of-pocket costs.
  • A useful tool for estate planning.
  • Assists in buy-sell agreements.


While the merits of split-dollar arrangements are abundant, you will want to be aware of potential pitfalls before moving forward.

For example, there is heavy regulation of split-dollar life insurance. Exercise caution and care when establishing an arrangement.

You may be subject to taxation. No doubt, complex tax rules apply.

Additionally, they require a contract. You must sign a legal document in order for the arrangement to be valid.

If the employee separates from the company, the policy’s premium payments might be too expensive for the employee to pay, putting the policy at risk of lapsing.

Keep in mind, loans or withdrawals from the cash value of the policy will reduce the death benefit to the beneficiaries.

If you are a public company, pay close attention to the Sarbanes-Oxley Act of 2002, which may prohibit the use of collateral assignment split-dollar arrangements.

Some employees view the arrangement as “golden handcuffs”.

Frequently Asked Questions

Let’s consider questions commonly asked regarding split-dollar life insurance. Keep in mind, answers are in generalities and are subject to change.

1. How are arrangements terminated?

Two possibilities exist:

  1. Separation from employment/end of the arrangement (often called a “roll-out” if retiring).
  2. The premature death of the employee.

The type of arrangement will determine what the exit will look like.


  1. Separation from employment/end of the arrangement
    • Option 1: The employee purchases the life insurance policy.
    • Option 2: The employer retains the life insurance policy and can either maintain, adjust, or surrender the policy.
  2. The premature death of the employee
    • First, the policy proceeds allow the employer to reclaim premium payments made.
    • Next, the employee’s beneficiaries receive the remaining policy proceeds.

Collateral Assignment

  1. Separation from employment/end of the arrangement
    • Option 1: Loan is paid back to the employer. The employee owns the life insurance policy outright.
    • Option 2: Employer forgives loan amount. The employee is taxed on the forgiven loan amount, and the employee owns the policy outright.
  2. The premature death of the employee
    • First, the policy proceeds allow the employer to recover loans for premium payments.
    • Next, the employee’s beneficiaries receive the remaining policy proceeds.

2. What determines the type of regime?

Policy ownership. 

Rules and regulations by the U.S. Department of the Treasury and IRS state that the owner of the policy dictates whether the arrangement is categorized as Economic Benefit Regime or Loan Regime.

Ownership of the life insurance contract determines which regime applies. – U.S. Department of the Treasury

To revisit:

  1. Economic Benefit Regime = Employer Owned, also called Endorsement Split Dollar
  2. Loan Regime = Employee Owned, also called Collateral Assignment Split Dollar

3. Can modifications be made?


The IRS allows modifications on split-dollar life insurance. Possible modifications include:

  • Premium payment mode
  • Beneficiary change
  • Policy loan interest payment
  • Change in ownership
  • Court-mandated change to policy
  • Termination of arrangement

Be mindful – changes to the arrangement may be subject to a reclassification of the arrangement, including new taxation rules.

4. Must the arrangement be considered life insurance?


The legal contract must be a form of life insurance, as defined by the IRS. In contrast, for example, the arrangement cannot be a modified endowment contract (MEC).

5. Do ERISA regulations apply?


ERISA, the Employee Retirement Income Security Act of 1974, is a federal mandate requiring minimum standards and contributions to pension plans for employees by private companies.

ERISA does not apply to split-dollar arrangements. Hence, employers can be selective in offering the arrangement to key employees that provide high-value to their company.

6. Is Split Dollar worth it?


The arrangement can be beneficial in a number of situations:

  • Key employee (executive) and employer
  • Estate planning
  • Buy sell agreements
  • Individuals

However, establish the arrangement with care. Heavy regulation and complex tax rules require you to use caution before proceeding.

Next Steps

Moving forward, ask yourself:

  1. How would split-dollar be advantageous (i.e. reward a key executive) for me?
  2. Which regime (Economic Benefit or Loan) makes sense for my situation?
  3. What type of permanent life insurance policy would I want to utilize for the arrangement?

Sophistication surrounds split-dollar arrangements. Collaborate with an experienced independent agent, and perhaps an attorney.


Heidi Mertlich

Heidi Mertlich is the owner of She is an independent life insurance agent specializing in no medical exam life insurance. Heidi is also an author for, an online community of life insurance experts.

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