Split Dollar Insurance Overview — Split-dollar life insurance is a way for two parties (often an employer and an executive, or an individual and an irrevocable trust) to share the costs and benefits of a life insurance policy. It’s not a specific product—you’re designing a contractual funding arrangement around a permanent policy to meet cash-value, tax, retention, or estate objectives. At Diversified Insurance Brokers, we help clients structure split-dollar so it’s understandable, compliant, and aligned with the outcome you actually want—benefits, buyout funding, key-talent retention, or legacy planning.

What split-dollar can accomplish: help a business retain key talent with a valuable benefit; reduce out-of-pocket cost for an executive while preserving meaningful death benefit; or support a family’s legacy planning when paired with a trust. Because you’re splitting premium, cash value, or death benefit (or some combination), the agreement determines who pays, who owns, who benefits—and how the arrangement unwinds.

How Split-Dollar Works (Plain-English)

At its core, there’s a policy (usually permanent life insurance) and a separate agreement that states how two parties share costs and benefits. The two most common styles are:

Loan Regime: One party (e.g., employer or parent) pays the premium and is treated as making a loan to the policy owner. Interest (often at the Applicable Federal Rate) is tracked annually; the loan is repaid later (from cash value, bonuses, or death benefit). This approach is popular for executive benefits and for trust-owned life insurance because ownership and control can remain with the insured or the trust.

Economic Benefit Regime: One party provides access to the policy’s death benefit, and the other party reports the “economic benefit” (the term cost) annually. It’s simpler early on but can become less efficient as the insured ages because the reportable term cost typically rises over time.

Who Uses Split-Dollar—and Why

Employers & Executives. Companies seeking a selective, high-value benefit for key people often consider split-dollar alongside key person life insurance for executives. Properly designed, the executive can enjoy significant personal protection and/or supplemental retirement values while the company keeps costs controlled and recoverable.

Business Partners. In closely held firms, split-dollar can complement life insurance to fund buy-sell agreements, especially when funding responsibilities aren’t equal or when one party needs help covering premiums during start-up or expansion years.

Families & Trusts. High-net-worth families may use loan-regime split-dollar to help an irrevocable trust acquire permanent insurance for estate liquidity or wealth transfer. While the trust owns the policy, another party advances premiums—documented as a loan—so future cash value or death benefit can ultimately repay the advance.

Design Choices That Matter

Ownership & Control: Who owns the policy determines control of cash values and riders. In corporate cases, the employee often owns the policy (or a trust does) while the employer holds a collateral assignment securing its interest. In family cases, trust ownership is common to keep the death benefit outside the estate.

Funding Pattern: Decide whether to pay premiums annually, in limited-pay schedules (e.g., 5–10 years), or with front-loaded funding. The pattern affects policy performance and the timing of any unwind or rollout.

Exit Strategy: Every split-dollar plan should include a clear timeline for termination—retirement, a specified year, or policy milestone. Rollout might use cash value to repay the loan, or, in an economic-benefit design, end the arrangement and leave the policy owned by the insured or trust.

Policy Type: The contract should be durable and efficient under stress testing (interest rate changes, market volatility, and actual costs of insurance). Our team stress-tests multiple carriers and explains how contract indemnity provisions and policy charges play into long-term results.

Tax & Compliance (High-Level)

Loan-regime designs typically track interest annually (with an imputed or stated rate), while economic-benefit designs track the annual “term cost.” Documentation is essential: collateral assignments, split-dollar agreements, and annual notices. We coordinate with your counsel and CPA to keep everything synchronized, especially when benefits interact with group vs. individual life insurance and executive compensation policies. We’ll also review existing policies to avoid surprises in charges, loans, or performance.

Benefits & Considerations

• Benefits: customizable cost sharing; potential recovery of advances; policy control can remain with the insured/trust; attractive executive benefit; estate liquidity when paired with trusts.
• Considerations: ongoing administration (interest or term-cost tracking); need for durable policy funding; exit planning; potential impact on crediting and charges—see our primer on life insurance table ratings explained.

Examples & Scenarios

Executive Retention (Loan Regime): Employer advances $50,000/year for 7 years to the executive’s personally owned policy. Interest is tracked at AFR. In year 12, cash value is sufficient to repay the outstanding loan (via withdrawal/loan or bonus) and the policy continues for the executive’s family. The company recovers costs; the executive keeps long-term protection.

Family Trust (Loan Regime): Parent lends premiums to an ILIT that owns a permanent policy on the parent. The ILIT makes interest payments (or accrues interest), and at death the loan is repaid from the tax-free death benefit. This can be more efficient than gifting large premiums annually, and it preserves policy control inside the trust.

Start-Up Partners (Economic Benefit): Two partners want buyout protection but can’t split costs equally today. They use an economic-benefit arrangement early on—lower cash outlay while the firm grows—then convert to a loan-regime structure or roll into a full business loan life insurance strategy once cash flow improves.

Why Work with Diversified Insurance Brokers

• Access to 75+ A-rated carriers and advanced case design
• Since 1980 — independent, client-first approach
• Stress-tested illustrations, policy audits, and ongoing administration support
• Clear documentation and collaboration with your attorney and CPA

Related Topics to Explore

• Key Person vs. Buy-Sell Insurance
• What Is a Fiduciary?
• Common Life Insurance Buying Mistakes
• Life Insurance Alternatives