Split Dollar Life Insurance

Life insurance is a valuable tool for financial protection and estate planning. One type of life insurance arrangement that offers unique advantages is split-dollar life insurance. This article aims to educate readers about split-dollar life insurance, how it works, and the benefits it provides.

Understanding Split Dollar Life Insurance: How It Works and Its Benefits

Split-dollar life insurance is a mutually beneficial agreement between an employer and an employee, typically a key employee or executive. It involves the sharing of the premiums, cash value, and death benefit of a life insurance policy. It’s also commonly used for companies that do not qualify for traditional deferred compensation plans.

Key elements and mechanics of split-dollar life insurance.

In a split-dollar life insurance arrangement, the employer and the employee enter into a split-dollar plan, which outlines the terms of the agreement. The employer pays the premiums for the life insurance policy, while the employee may contribute a portion of the premiums. The split-dollar plan can be structured in various ways to suit the specific needs of both parties.

Benefits of split dollar life insurance

One of the primary benefits of split-dollar life insurance is the accumulation of cash value. The policy’s cash value grows over time, typically based on the performance of the underlying investments. This cash value can be accessed by the policy owner, either through policy loans or withdrawals. The cash value can provide additional liquidity and potential retirement income for the employee.

Another key feature of split-dollar life insurance is the death benefit.

The death benefit is the amount paid to the beneficiaries upon the insured person’s passing. In a split-dollar policy, the death benefit is usually split between the employer and the employee. The employee’s share can provide valuable life insurance protection for their loved ones, while the employer’s share can help recover the premiums paid.

Split-dollar life insurance arrangements offer several benefits for both employers and employees.

Employee Benefits

For key employees, it can serve as an attractive addition to their compensation package. It provides life insurance coverage and the opportunity to accumulate cash value over time, which can be used for various financial needs, such as education expenses or retirement planning.

Employer Benefits

Employers, on the other hand, may use split-dollar life insurance as a tool to attract and retain key employees. By offering an additional employee benefit, such as split-dollar life insurance, employers can enhance their overall compensation packages and create a sense of loyalty and long-term commitment.

Tax advantages

From a tax perspective, split-dollar life insurance can also provide advantages. The economic benefits derived from the policy are generally subject to income tax. However, the taxable income associated with split-dollar arrangements can be structured in different ways, such as the economic benefit regime or the loan regime, depending on the specific terms of the agreement and applicable regulations.

Estate Planning

Split-dollar life insurance arrangements can be particularly beneficial for estate planning purposes. By structuring the ownership of the policy and the split-dollar agreement appropriately, individuals can minimize estate taxes and ensure the efficient transfer of assets to their beneficiaries. For example, using an irrevocable life insurance trust (ILIT) in conjunction with split-dollar life insurance can provide significant estate tax advantages.

It’s important to note that the specific rules and regulations governing split-dollar life insurance arrangements may vary by jurisdiction. For instance, New York has specific guidelines for private split-dollar arrangements. Therefore, it’s crucial to consult with a qualified insurance professional or financial advisor to ensure compliance with local laws and regulations.


In summary, split-dollar life insurance offers a unique opportunity for employers and employees to share the premiums, cash value, and death benefit of a life insurance policy. It provides valuable life insurance protection, potential cash accumulation, and numerous tax and estate planning benefits. By understanding the mechanics and benefits of split-dollar life insurance, individuals can make informed decisions about incorporating this strategy into their overall financial and estate planning goals.

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Frequently Asked Questions

What are the disadvantages of split dollar life insurance?

Some potential disadvantages of split dollar life insurance include complex tax implications, potential disputes over policy ownership, limitations on the employee’s ability to access cash value, and the need for careful planning to ensure compliance with applicable regulations.

What are the advantages of a split dollar life insurance plan?

Split dollar life insurance plans offer advantages such as providing life insurance protection, accumulating cash value, enhancing compensation packages for employees, attracting and retaining key employees, and supporting estate planning objectives.

Who pays for split dollar life insurance?

In a split dollar life insurance arrangement, the employer typically pays the premiums for the life insurance policy. However, the employee may also contribute a portion of the premiums.

What is a split dollar life insurance plan

A split dollar life insurance plan is an agreement between an employer and an employee, where they share the premiums, cash value, and death benefit of a life insurance policy. It is designed to provide mutual benefits to both parties.

What is a cost-of-living adjustment?

A cost-of-living adjustment, commonly known as a COLA, is an automatic increase in benefits or payments to account for inflation and the rising cost of living. It is often used in retirement plans or insurance policies to ensure that the benefits keep pace with inflation.

What is the difference between a variable life insurance policy and a fixed life insurance policy?

A variable life insurance policy allows policyholders to allocate their premiums into investment accounts, such as stocks or bonds, with the potential for growth but also the risk of loss. In contrast, a fixed life insurance policy offers a guaranteed death benefit and cash value accumulation based on a predetermined interest rate.

What are the split dollar life insurance tax implications?

Split dollar life insurance arrangements have complex tax implications. Generally, the employee is subject to income tax on the economic benefit received from the policy. The employer may also have tax considerations related to the premium payments and the policy’s cash value growth. It is advisable to consult with a tax professional to understand the specific tax implications in your situation.

What is a life insurance rider?

A life insurance rider is an additional provision or feature that can be added to a life insurance policy to modify its coverage or terms. Common riders include accelerated death benefit riders, which allow policyholders to access a portion of the death benefit if they become terminally ill, and waiver of premium riders, which waive future premium payments if the insured becomes disabled.

What is an example of a company that provides split dollar life insurance?

Various insurance companies offer split dollar life insurance, including major providers like Lincoln, New York Life, Prudential, and MassMutual just to name a few. It is advisable to research and consult with insurance professionals to find a company that best meets your specific needs.

What is a vesting schedule?

A vesting schedule is a timetable that determines when an employee becomes entitled to the full benefits or ownership rights associated with a retirement plan or other employee benefits. It specifies the length of service required for the employee to fully “vest” in their employer-provided benefits.