Split Dollar Plans

A Split dollar plan offers a creative solution to helping your key employee obtain needed life insurance.

The Advantages of a Split Dollar Plan:

  • Allows your business to provide select benefits to key employees.
  • Key employee receives valuable life insurance protection and potentially the benefits of owning a permanent life insurance policy.
  • Business will either be the owner of the policy (the economic benefit arrangement) or will recover the costs of the arrangement (the loan arrangement).

Split dollar is a term that covers two different executive benefit arrangements

  • The Split Dollar Economic Benefit  (Traditional) arrangement provides an income tax-free death benefit to the key employee while providing the business with key person protection.

The Split Dollar Loan Regime arrangement provides the key employee with the ownership of a permanent life insurance policy, the business with cost recovery all at a cost to the employee of the interest on the premium paid by the business.

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With Loan Regime Split Dollar the policy is owned by the Executive.  The business pays the

premium on the policy which is treated as a loan to the Executive.  To protect the business’ interest in the arrangement, the Executive collaterally assigns a portion of the policy death benefits to the business and pays interest to the business on the loan each year.

We note that the business is a C-Corporation in a 21% Federal tax bracket and the Executive’s personal tax bracket is higher – often 35-40%.  By using split dollar, the business can pay the premium on the policy using their 21% tax bracket, and treat that payment as a loan (not income) to the Executive who will pay interest to the business.  The interest received by the business is treated as taxable income and the after-tax interest is a business asset.

Upon the death or retirement of the covered Executive, the loan is repaid to the business through either the policy death benefits, cash value, if there is sufficient cash, or out-of-pocket.  At that point, the loan repayment retires the debt and the remaining benefits go to the executive or his family.


This information is not intended as tax or legal advice. For advice concerning your own situation, please consult with your appropriate professional advisor. The ability of a life insurance contract to accumulate sufficient cash value to meet accumulation goals will be dependent upon the amount of extra premium paid into the policy, and the performance of the policy, and is not guaranteed. Policy loans and withdrawals reduce the Cash value and face amount of the death benefit.

In this arrangement the employer owns the policy and the benefit split to the employee is provided by an endorsement on the policy.  Since the economic benefit provided by the policy (Death Benefit protection) is a taxable benefit, there has to be a way to value it.  The IRS uses the cost of the life insurance protection provided to the employee based upon Table 2001 term rates.  As an alternative we can also use the insurer’s renewable term rates to value the life Insurance provided.  In return for paying the term cost (or tax on the term cost) the death benefits are tax-free to the employee’s family.

Capital Split Dollar is a “Safe Harbor” tax deductible plan for funding retirement benefits, buyouts and estate liquidity.  It uses bank financing to fund a Loan Regime Split Dollar Policy for an S-Corp or LLC.  Because S-Corps and LLCs don’t have their own tax bracket, Capital Split dollar keeps the tax benefits/costs as neutral as possible. 

A loan from the bank to the business is not taxable.  The payment of a Loan regime split dollar premium for the employee is not taxable.  Interest paid to the company by the employee for the premium loan is not deductible, but is taxable to the business.  In turn, the business pays interest to the bank which is deductible, so these two are close to a wash. 

After 10-15 years the employee takes a loan from the policy to repay the employer.  The employer uses the funds to repay the bank ending the plan.

Since the bank loan is to the corporation, the Corp or LLC must be profitable.  Some collateral may be required.