Split-dollar life insurance is not a special policy type but a written agreement about how to share one. It usually appears in arrangements between an employer and a key employee whose absence could materially impact operations.

Instead of a simple “company pays, family gets the benefit” setup, split-dollar structures spell out who pays premiums, who owns the policy and how the death benefit and cash value are divided.

How It Works

Most split-dollar plans are built on permanent life insurance, commonly a whole life or universal life policy. These contracts offer lifelong coverage and build cash value over time as premiums are paid.

The employer and employee agree in writing on three core items: how premiums will be funded, how death benefits will be shared and what access either party has to the growing cash value inside the policy. Because the agreement touches tax, benefits and corporate planning, these arrangements are typically designed with help from insurance, legal and tax professionals.

Lance Cothern, a certified public accountant and personal finance writer, writes, “In reality, there isn’t a particular type of insurance called split-dollar life insurance.” He is emphasizing that “split-dollar” describes a contractual cost-and-benefit split between parties, not a distinct life insurance product you can buy off the shelf.

Paying Premiums

In many plans, the employer pays all premiums on the policy covering the key employee. This makes the arrangement a powerful executive benefit, without upfront out-of-pocket cost for the individual. Some contracts split premiums between employer and employee, either equally or using a formula. The exact cost-sharing schedule is written into the agreement so everyone understands their obligations from day one.

Ownership Choices

A crucial design choice is who owns the life insurance policy. Ownership controls who can change beneficiaries, access cash value and decide whether to keep or surrender the coverage. Under an employer-owned design, the company owns the policy, pays premiums and controls changes. The employee’s family is named for part of the death benefit, while the company is reimbursed from the remainder.

In an employee-owned design, the individual owns the policy, names beneficiaries and can reach the cash value, but must agree that the employer will receive a portion of the death benefit at least equal to its contributions.

Tax Treatment

Tax rules differ based on ownership. With employer-owned split-dollar, premium payments are usually treated as an economic benefit to the employee. The value of that coverage is generally taxable income, and the employer may be able to deduct costs when treated as compensation and when other requirements are met.

With employee-owned arrangements, the employer’s payments are often treated as a series of loans rather than pure benefits. If those loans carry little or no interest, the “forgiven” interest is considered a taxable perk that must be reported by the employee. Because the tax details are intricate and change over time, split-dollar designs almost always require careful coordination with a tax professional.

Collateral Assignment

Employee-owned split-dollar plans often use a collateral assignment. The employee pledges certain policy rights as security for the amounts the employer has advanced. If the policy’s cash value is not sufficient to repay the employer when the contract ends or the employee dies, the agreement will specify how far the company can go to recover the balance. That recovery level can be non-recourse, limited recourse or full recourse.

Under non-recourse, the employer is repaid only from policy values, and any shortfall may be treated as taxable income to the employee. Limited and full recourse agreements allow the employer to pursue the employee or estate, to different degrees, for remaining amounts.

Cash Value

Permanent life insurance builds a cash value reserve that can be used during the insured person’s lifetime. In split-dollar plans, who can tap that value depends on the ownership structure and contract language.

When the employee owns the policy, the cash value can become a flexible planning tool. It might supplement retirement income, provide emergency liquidity or help fund other goals, subject to repayment terms and tax rules. If the employer owns the policy, access to cash value is usually reserved for the company, which may use it for corporate planning or as security for its premium advances.

Plan Types

Two broad structures dominate split-dollar practice: endorsement arrangements and loan-based arrangements.

In an endorsement arrangement, the employer owns the policy and “endorses” a portion of the death benefit to the employee’s beneficiaries. The company recovers its premium outlay first, and the remaining benefit flows to the family.

In a loan-based arrangement, the employer advances funds to the employee, who then pays premiums on an individually owned policy. Those advances accrue interest and are repaid from the policy’s cash value or death benefit under the agreed terms.

Pros And Cons

For employers, split-dollar life insurance can soften the financial shock of losing a key person while serving as an attractive executive perk. It can also be structured to provide tax advantages and coordinate with broader compensation and retention strategies.

For employees, the arrangement may create valuable permanent coverage without bearing the full cost. Access to cash value under employee-owned designs can support estate planning or long-term savings. The trade-off is complexity. Split-dollar agreements are far more intricate than simple term policies. They require careful drafting, ongoing administration and strict attention to tax and regulatory rules. Missteps can lead to unexpected taxes or disputes over who is entitled to what.

Final Thoughts

Split-dollar life insurance sits at the crossroads of insurance, tax planning and executive compensation. When designed thoughtfully, it can protect a business, reward a key contributor and create long-term financial value for both sides. However, the same complexity that makes it flexible also makes professional guidance essential. For a particular company and leader, the real question is simple: does the value of shared protection and benefits justify the added cost, paperwork and oversight that come with a split-dollar plan?