ASF Insurance Agency
What Is Split-Dollar Life Insurance?
Split-dollar is not a separate insurance product. It is a written arrangement that divides the premiums, policy rights and death benefit of a permanent life insurance policy between two parties—often an employer and executive, or an individual and an irrevocable life insurance trust.
The agreement should state who owns the policy, who pays premiums, who controls cash value, how the premium funder is repaid, and what happens after retirement, termination, disability or death.
Why a Business Might Consider It
A closely held business may explore split-dollar insurance to retain a key executive, provide a selective supplemental benefit or support succession and legacy planning. The company may fund premiums while retaining a contractual right to recover an agreed amount. The remaining death benefit may be available to the executive’s beneficiaries, subject to the agreement and policy terms.
This structure is different from buy-sell funding or key-person insurance. Each solves a different business problem, even though all may involve life insurance.
Two Federal Tax Frameworks
Federal rules generally analyze split-dollar arrangements under an economic-benefit regime or a loan regime. Under the economic-benefit approach, the policy owner may provide current life insurance protection whose value can be taxable to the recipient. Under the loan approach, premium advances may be treated as loans, requiring appropriate interest and reporting.
Ownership and access to policy cash value influence which framework applies. The parties should have tax and legal advisors review the agreement before the first premium is paid. The governing federal rules are found in 26 CFR §1.61-22 and 26 CFR §1.7872-15.
Costs and Tradeoffs to Review
- Policy charges: permanent insurance can include cost-of-insurance and administrative charges.
- Surrender restrictions: early surrender may produce less value than premiums paid.
- Nonguaranteed results: illustrated cash values and credited interest may differ from actual performance.
- Administrative work: the arrangement needs documentation, annual review and tax reporting.
- Exit risk: the agreement must explain repayment, transfer and termination options.
With indexed universal life insurance, caps, participation rates, spreads and policy charges affect results. A zero-percent index-crediting floor does not prevent policy charges or guarantee that the policy will remain adequately funded.
Questions to Answer Before Proceeding
- What specific business or estate-planning objective is being addressed?
- Who owns the policy and controls its cash value?
- How and when is the premium funder repaid?
- Can the business continue premiums during weaker years?
- What happens if the executive leaves or the business is sold?
Discuss the Design Before Funding It
ASF Insurance Agency can help business owners compare policy designs and identify questions for their CPA and attorney. To discuss the insurance portion with Avi Foox, call 732-798-0091 or contact ASF Insurance Agency.
This article is educational and is not personalized tax, legal or investment advice. Policy guarantees depend on the insurer’s claims-paying ability.