Split-dollar life insurance isn’t a special kind of policy — it’s an agreement between two parties to share the cost and benefits of a permanent life insurance policy.
It’s often used by business owners and top executives as part of a company benefit plan or an estate planning strategy to reduce taxes and transfer wealth efficiently.
What is split-dollar life insurance?
In a split-dollar life insurance arrangement, two or more people or entities — like a company and an employee — split ownership of a permanent life insurance policy and its cash value.
Permanent policies (like whole life or universal life) accumulate cash value over time, which both parties can benefit from depending on the terms of their agreement.
While it’s sometimes used personally, split-dollar insurance is most common in business settings, where it can help companies attract top talent or protect against the financial impact of losing an executive.
Learn more >> Take a deeper dive into permanent life insurance
How split-dollar life insurance works
Every split-dollar policy involves two or more parties and a written agreement that outlines:
Who pays the premiums
Who owns the policy
How the death benefit and cash value are divided
Who receives the payout
How and when the agreement ends
For example, in a business context:
The employer might pay the premiums and retain a portion of the death benefit.
The employee or their family may receive the remaining death benefit or access the cash value.
These arrangements can continue for decades or end when the employee retires, leaves the company, or repays the employer’s share.
Who can own a split-dollar policy?
Ownership depends on the agreement. Split-dollar plans can involve:
You (the employee): You own the policy, but your employer may pay some or all premiums.
Your employer: The company owns the policy and uses part of the payout to recover business costs.
A business partner: Common in buy-sell agreements for small businesses.
A trust: Used in estate planning to keep the policy out of your taxable estate.
A family member: Can help reduce future estate taxes.
Learn more >> Take a deeper dive into life insurance trusts
2 main types of split-dollar agreements
1. Economic benefit (endorsement) agreement
In this setup, the employer owns the policy and pays the premiums, but the employee receives part of the benefits — like the death benefit or cash value.
Tax treatment:
The employee is taxed on the “economic benefit” of the coverage each year, similar to how fringe benefits are taxed.
The employer can recoup the premiums later through the policy’s death benefit.
2. Collateral assignment (loan regime)
Here, the employee owns the policy, and the employer pays the premiums. The employer’s portion of the policy acts as collateral for a loan.
Tax treatment:
The premiums paid by the employer are treated as an interest-free loan to the employee.
The employee pays tax only on the imputed interest (known as the applicable federal rate).
This setup is more complex, but can be more tax-efficient for high earners or executives.
Pros & cons of split-dollar life insurance
Split-dollar life insurance for estate planning
In estate planning, split-dollar arrangements are sometimes used to minimize estate taxes by placing the policy in an irrevocable life insurance trust (ILIT) or transferring ownership to family members.
This strategy is typically for people with large estates (over $13.61 million, as of 2024). It can help preserve wealth for heirs — but it’s complex and should be done with professional tax and legal guidance.
Learn more >> What is estate tax & who has to pay it?
The bottom line
Split-dollar life insurance is a specialized strategy, not a mainstream life insurance product. It can be powerful for businesses and high-net-worth families — but it’s not necessary for most people.
If you’re considering it, make sure to work with a financial professional who understands how to structure it correctly — and explore simpler coverage options first.
Talk to a licensed Policygenius expert to compare policies and find the best fit for your business or estate plan. Our agents don’t make commissions, so their only goal is helping you protect what matters most.
