What is a Split Dollar Life Insurance Plan?

Split Dollar Life Insurance plans offer a unique way for employers to provide valuable life insurance benefits to key employees while sharing the financial burden. These plans involve a life insurance policy, where the premiums, benefits, and ownership rights are divided between the employer and employee according to a predetermined agreement [1]. The arrangement is often used as a powerful retention tool, providing a significant benefit that can help attract and retain top talent [2].

There are two main types of Split Dollar arrangements: Collateral Assignment (Loan Regime) and Endorsement (Economic Benefit Regime). In a Collateral Assignment arrangement, the employee owns the policy, and the employer's premium payments are treated as a loan to the employee. The employee typically repays the loan when the policy matures, or the death benefit is paid out, and any remaining benefits go to the employee's beneficiaries [3]. On the other hand, in an Endorsement arrangement, the employer owns the policy and endorses a portion of the death benefit to the employee or their beneficiaries. Here, the employer retains control of the policy and may reclaim its premium costs from the death benefit [4].

"Split-dollar life insurance is a strategy that allows the sharing of the cost of a premium for a permanent life insurance policy. They are often a key part of an executive compensation package and can provide a benefit to both the employer and employee." [1]

The flexibility of Split Dollar plans allows for customization based on the needs of both the employer and the employee. For instance, an employer might set up a Split Dollar plan as part of an executive's compensation package, providing the employee with access to the cash value of the policy, which can be tapped into during the employee's lifetime [5]. Alternatively, these plans can be structured to assist with estate planning, where the life insurance benefits help to cover estate taxes, ensuring that the employee's heirs are not burdened with hefty tax bills [3].

While Split Dollar Life Insurance plans can offer significant benefits, they do come with complexities. The tax implications, for both employer and employee, are particularly important to understand. For example, the IRS treats the premium payments differently depending on the structure of the arrangement, which can affect the employee's taxable income [2]. Additionally, regulatory changes over the years have altered how these plans are viewed, so it's crucial for both parties to stay informed and consult with financial and legal advisors to ensure compliance with current laws and regulations [1].

In essence, a Split Dollar Life Insurance plan is a strategic tool, allowing employers and employees to share the costs and benefits of life insurance in a way that can be mutually advantageous. However, the complexity of these arrangements means they are best suited for situations where the benefits justify the administrative and legal efforts required to maintain them [4] [5].

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References 

 [1] Investopedia. (n.d.). How Split-Dollar Life Insurance Works. Retrieved from https://www.investopedia.com/articles/professionals/010616/split-dollar-life-insurance-how-it-works.asp 

 [2] Nationwide. (n.d.). Split Dollar Plans. Retrieved from https://www.nationwide.com/business/employee-benefits/key-person/employee-retention/split-dollar-life-insurance-plans/ 

 [3] U.S. News. (2024, April 18). What is Split-Dollar Life Insurance? Retrieved from https://www.usnews.com/insurance/life-insurance/what-is-split-dollar-life-insurance 

 [4] New York Life. (n.d.). Split-Dollar Life Insurance. Retrieved from https://www.newyorklife.com/articles/split-dollar-life-insurance 

 [5] Forbes Advisor. (2023, October 9). Split-Dollar Life Insurance Explained. Retrieved from https://www.forbes.com/advisor/life-insurance/split-dollar-life-insurance/