What is Split Dollar Life Insurance
Jason Stolz CLTC, CRPC
Split Dollar Life Insurance is an advanced strategy that allows two parties—usually an employer and an employee, or a business owner and their company—to share the cost and benefits of a permanent life insurance policy. Rather than one party carrying the full financial burden, split dollar structures allocate premiums, cash value rights, and death benefit interests through a written agreement.
At Diversified Insurance Brokers, we help executives, business owners, physicians, and closely held companies structure split dollar plans that create long-term tax-advantaged benefits, retention incentives, and estate-planning advantages. This page gives you a clear, consumer-friendly overview of how these arrangements work—and who may benefit from them.
How Split Dollar Life Insurance Works
Although every agreement is customized, the basic idea is simple: one party funds a permanent life insurance policy (usually whole life or indexed universal life), and another party receives certain benefits, such as cash value access, supplemental retirement income, or death benefit protection. The arrangement defines:
- Who pays premiums (partially or fully)
- Who owns the policy
- Who controls cash value
- Who receives death benefits
- How and when the agreement ends
Split dollar is not a policy type—it’s a legal agreement that sits around a life insurance contract and determines financial rights and obligations.
Two Primary Split Dollar Structures
1. Economic Benefit (Employer-Owned) Split Dollar
With an economic benefit arrangement, the employer owns the policy and pays the premium. The executive or employee receives access to the death benefit (or a portion of it) and is taxed only on the annual “economic benefit cost,” which is typically lower than the full premium. When the agreement ends, the employer recovers its premiums or cash value per the contract.
Best for: Executive benefits, key-person retention, golden handcuff strategies, recruiting high-value professionals.
2. Loan Regime (Employee-Owned) Split Dollar
With a loan regime arrangement, the employee owns the policy. The employer contributes premiums as a loan—often interest-bearing depending on IRS AFR rate requirements. Policy cash value eventually repays the loan, and the employee retains the remaining value or benefit. This structure is especially popular for high-income earners seeking tax-advantaged supplemental retirement income.
Best for: Business owners, physicians, executives wanting personal cash value growth and long-term tax efficiency.
Why People Use Split Dollar Life Insurance
Split dollar is appealing because it shifts the financial burden while creating powerful benefits—especially when structured with permanent life insurance designed for growth. For many, it’s a smarter, more flexible alternative to traditional executive bonus plans or deferred compensation agreements.
- Lower out-of-pocket cost for the individual receiving coverage
- Tax-advantaged accumulation through cash value growth
- Enhanced executive benefits without long-term employer liabilities
- Golden handcuffs for retention (the agreement can require staying with employer)
- Estate-planning advantages when paired with an ILIT
- Access to policy loans or withdrawals for supplemental retirement income
Common Use Cases
At Diversified Insurance Brokers, we see split dollar used most often in:
- Executive compensation packages
- Key-person retention programs
- Family-owned businesses planning transitions
- Physician groups and dental practices
- High-net-worth estate planning via ILITs
Executives appreciate that the employer shares or fronts the cost of a high-cash-value policy. Employers appreciate the retention and recruiting power. Families appreciate the long-term estate benefits.
Tax Treatment of Split Dollar Arrangements
Split dollar plans must be structured carefully to comply with IRS rules under IRC §61, §83, and §7872. Incorrect design can lead to unnecessary taxable events.
In economic benefit arrangements: The employee is taxed on the cost of the life insurance protection provided.
In loan regime arrangements: Premiums are treated as loans and must meet AFR interest requirements to avoid imputed interest taxation.
High-quality legal and tax coordination is essential. At Diversified Insurance Brokers, we work directly with your tax and legal team to help ensure compliance without overcomplication.
How Split Dollar Ends (The “Termination” Stage)
A split dollar agreement typically ends upon:
- Retirement
- Separation from service
- A specified number of years
- Death of the insured
At termination, the party that paid premiums is reimbursed—either from cash value or death benefit, depending on the agreement. Remaining value typically belongs to the employee or designated trust.
Pros and Cons of Split Dollar Life Insurance
Pros
- Lower net cost to the insured
- Tax-advantaged wealth accumulation
- Retention and recruiting tool for employers
- Potential estate-planning leverage
- Flexible design & exit strategies
Cons
- Requires legal documentation and coordination
- Must follow IRS rules carefully
- May be more complex than standard executive benefits
Who Should Consider Split Dollar?
Split dollar is ideal for:
- Executives earning $250K+
- Business owners in pass-through or closely held companies
- Family offices and estate-planning families
- Firms competing for high-level talent
- Physicians and medical practice partners
It’s not typically suited for individuals seeking low-cost term life insurance or those without an employer/business entity to partner with.
Additional Insurance Strategies to Consider:
To help you explore related strategies, you may also want to review:
- Life Insurance Strategies the Wealthy Use
- Whole Life as an Investment
- What Is a Life Insurance Exam?
Related Pages
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FAQs: Split Dollar Life Insurance
Is split dollar life insurance a policy?
No. It’s not a policy type—it’s a legal agreement describing how two parties share the costs and benefits of a permanent life insurance policy.
Who typically uses split dollar arrangements?
Mainly employers offering executive benefits, business owners, physicians, key-person employees, and high-net-worth families using ILITs for estate planning.
Can split dollar help with executive retention?
Yes. Many employers use split dollar as a “golden handcuff” strategy because benefits often vest or unlock over time.
What type of policy is used?
Most split dollar plans use whole life or indexed universal life policies because they generate long-term cash value.
Who owns the policy?
It depends on the agreement. In economic benefit plans, the employer often owns it. In loan regime plans, the employee or trust owns it.
Are split dollar plans taxable?
They must follow IRS rules. Taxes depend on whether the agreement is economic benefit or loan regime, but both can be highly tax-efficient when structured correctly.
Can split dollar be used in estate planning?
Yes. Loan regime split dollar with an ILIT is a common technique for reducing estate taxes and leveraging gift-tax advantages.
