Understanding Split-Dollar Life Insurance Arrangements

What is split-dollar life insurance?

Split-dollar life insurance is a financial arrangement where an employer and employee share the costs and benefits of a life insurance policy. Typically, the employer pays the premiums while the employee retains the death benefit or a portion of it, creating a cost‑effective way to provide supplemental coverage.

Common structures

Two primary structures dominate the market:

• Endorsement (or "collateral assignment") method: The employee owns the policy; the employer receives a lien on the cash value and the death benefit to recover premiums paid.
• Loan method: The employer purchases the policy and loans the premium amount to the employee, who repays with interest. The employer retains the death benefit, and any excess cash value belongs to the employee.

Key benefits

Split‑dollar plans can serve both parties:

• Employer advantage: Attracts talent, offers a tax‑advantaged benefit, and can be structured to avoid taxable compensation.
• Employee advantage: Access to higher coverage amounts than personal underwriting might allow, often at a lower out‑of‑pocket cost.

Risks and considerations

Because the arrangement blends employment and insurance, several pitfalls exist:

• Tax treatment: Improper documentation can trigger taxable income for the employee or employer.
• Policy ownership disputes: Changes in employment status may affect who controls the cash value or death benefit.
• Interest rates: Loan‑method plans rely on interest rates that may shift, affecting repayment amounts.

Tax implications

The IRS provides guidance that, when followed, keeps the split‑dollar arrangement tax‑neutral:

• If the employee is deemed the owner, premiums are generally not taxable to the employee, and the death benefit is tax‑free.
• When the employer is the owner, the employee may receive taxable imputed income based on the policy's value.

Choosing the right approach

Assess the organization's goals and the employee's financial situation. Employers should draft clear agreements outlining premium payments, repayment terms, and what happens if the employee leaves. Employees should understand ownership rights, potential taxable events, and the impact on their overall financial plan.

Sample comparison table