Cassidy Horton is a finance writer covering banking, life insurance and business loans. She has worked with top finance brands including NerdWallet, MarketWatch and Consumer Affairs. Cassidy first became interested in personal finance after paying of.
Cassidy Horton Personal Finance Reviewer and WriterCassidy Horton is a finance writer covering banking, life insurance and business loans. She has worked with top finance brands including NerdWallet, MarketWatch and Consumer Affairs. Cassidy first became interested in personal finance after paying of.
Written By Cassidy Horton Personal Finance Reviewer and WriterCassidy Horton is a finance writer covering banking, life insurance and business loans. She has worked with top finance brands including NerdWallet, MarketWatch and Consumer Affairs. Cassidy first became interested in personal finance after paying of.
Cassidy Horton Personal Finance Reviewer and WriterCassidy Horton is a finance writer covering banking, life insurance and business loans. She has worked with top finance brands including NerdWallet, MarketWatch and Consumer Affairs. Cassidy first became interested in personal finance after paying of.
Personal Finance Reviewer and Writer Ashlee Valentine Deputy Editor, InsuranceAshlee is an insurance editor, journalist and business professional with an MBA and more than 17 years of hands-on experience in both business and personal finance. She is passionate about empowering others to protect life's most important assets. Wh.
Ashlee Valentine Deputy Editor, InsuranceAshlee is an insurance editor, journalist and business professional with an MBA and more than 17 years of hands-on experience in both business and personal finance. She is passionate about empowering others to protect life's most important assets. Wh.
Ashlee Valentine Deputy Editor, InsuranceAshlee is an insurance editor, journalist and business professional with an MBA and more than 17 years of hands-on experience in both business and personal finance. She is passionate about empowering others to protect life's most important assets. Wh.
Ashlee Valentine Deputy Editor, InsuranceAshlee is an insurance editor, journalist and business professional with an MBA and more than 17 years of hands-on experience in both business and personal finance. She is passionate about empowering others to protect life's most important assets. Wh.
| Deputy Editor, Insurance
Updated: Oct 9, 2023, 7:00am
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When two or more parties share the benefits, cost and ownership of a permanent life insurance policy, it’s called a split-dollar life insurance agreement or a split-dollar policy. This type of life insurance agreement is most commonly used in executive or high-level employee compensation packages but is sometimes also used in estate planning.
Split-dollar life insurance is a contract between two (or more) parties that specifies how the benefits of a permanent life insurance policy will be shared. The name “split-dollar” is derived from the method of sharing or “splitting” the cash value and death benefits.
As part of an employee compensation package, an employer might pay the premiums for an executive’s life insurance policy. In return, if the executive dies, the employer might be reimbursed by the death benefit for any premiums they paid, and the remaining death benefit would go to the executive’s beneficiaries.
There are two main types of split-dollar policies: one where you own the policy (collateral assignment split dollar) and one where your employer owns it (endorsement split dollar).
Under a collateral assignment split-dollar policy, you (the insured person) own the policy, but the other party—often an employer—helps pay the premiums. If you die, part of the death benefit will be used to pay back the employer for the premiums paid (or another predetermined amount). The rest will go to your beneficiaries, such as your spouse or children
If you terminate the policy, the employer will be paid back for the premiums (or other predetermined amount) from the life insurance cash value, and you’ll keep the rest.
In this arrangement:
The other most common type of split-dollar life insurance is the endorsement split-dollar arrangement. Under this arrangement, your employer owns and pays for the life insurance policy. The employer then endorses a portion of the death benefit over to your designated beneficiaries.
Essentially, the death benefit is split between the employer and your beneficiaries based on previously agreed-upon percentages or amounts.
In this arrangement:
The IRS has specific rules for how it taxes split-dollar plans. It largely depends on who owns the policy.
If you (the executive or individual) own the life insurance policy, any money your employer pays toward the policy is seen as a loan on which you must pay interest.
Be sure the interest rate is at least what the IRS calls the “applicable Federal rate.” If it’s lower, you will have to pay income taxes on the difference.
If your employer owns the policy, any money it puts into the policy is considered a taxable economic benefit for you. That means you’ll have to pay taxes on the value of the insurance and its cash value.
Split-dollar life insurance comes with many benefits that make it a versatile tool for employers and individuals.
If you have a high net worth, private split-dollar life insurance can help you transfer wealth to your beneficiaries in a tax-efficient way. The life insurance death benefit is paid tax-free, so you can pass on a substantial sum to your loved ones without the heavy tax implications of other methods.
An irrevocable life insurance trust (ILIT) is often used for split-dollar plans for estate planning. In this setup, the ILIT owns the life insurance policy, so when you pass away, the death benefit isn’t included in your taxable estate. This helps reduce potential estate taxes.
For estate planning, the split-dollar life insurance arrangement is not between an employer and employee but rather between an individual and their trust or another party, with the main goal of wealth transfer, not employee compensation.
What happens if you or your employer want to end a split-dollar life insurance plan? It depends on the type of arrangement you have.
Always consult with a financial advisor or tax professional before making decisions about split-dollar life insurance. Everyone’s arrangement and tax situation is unique, and a professional can help you navigate what’s best for you.
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Personal Finance Reviewer and WriterCassidy Horton is a finance writer covering banking, life insurance and business loans. She has worked with top finance brands including NerdWallet, MarketWatch and Consumer Affairs. Cassidy first became interested in personal finance after paying off $18,000 in debt within 10 months of graduating college. She later went on to triple her salary in two years by ditching her 8-to-5 job to write for a living.
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