Split-dollar life insurance

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Split-dollar life insurance is a life insurance arrangement in which an employer and an employee (typically an executive) split an individual, permanent life insurance policy with a cash value. It is used as a method of saving, providing long-term, high value insurance protection, and transferring assets from a business.

Since late 2003, IRS regulations have substantially limited the usefulness of split-dollar life insurance.


Types of Split-dollar Life Insurance

Split-dollar life is broadly divided into endorsement split dollar, collateral assignment split dollar, and reverse split dollar.

Endorsement Split Dollar

An endorsement split dollar arrangement is a life policy on the employee owned and paid for by the employer. Pursuant to a written agreement, part of the death benefit is endorsed to a beneficiary selected by the employee. Endorsement split dollar policies may be kept by the employer after an employee separates from service, or they may be transferred to the employee (although this is a taxable event).

Collateral Assignment Split Dollar

A collateral assignment split dollar arrangement is a life policy on the employee that is owned by the employee. The agreement typically specifies that premiums, cash value, and death benefits are split between the employee and employer. If the policy is cashed out or matures (i.e., pays a death benefit), the employer is usually entitled to cash value or a death benefit that equals the premiums it has paid, while the employee keeps the rest. If the employee separates from service with the policy still in force, the employee must pay the employer for the premiums it has paid, but the employee retains ownership and full control of the policy.

Reverse Split Dollar

A reverse split dollar arrangement is a life policy on the employee that is owned by the employee. In return for paying part of the premiums, the employer is assigned part of the policy's death benefit.

Taxation and Grandfathering

Treas. Reg. Sections 1.61-22, 1.301-1(q), and 1.7872-15 provide rules for the taxation of participants in a split-dollar life insurance arrangement. Those regulations generally apply to any split-dollar life insurance arrangement entered into after September 17, 2003. For this purpose, if an arrangement entered into on or before September 17, 2003, is materially modified after September 17, 2003, the arrangement is treated as a new arrangement entered into on the date of the modification. Section 1.61-22(j)(2)(ii) sets forth a non-exclusive list of changes that are not treated as material modifications for this purpose.

Grandfathered Arrangements

Prior to the 2003 regulations, employer-paid split dollar arrangements were ordinarily taxed by imputing the cost of an equivalent amount of term life insurance as income to the employee. As the premiums for a permanent policy were usually much higher than the equivalent term cost, this effectively allowed the employee to receive an economic benefit that was largely free of tax.

Current Regime

Currently, split dollar arrangements are taxed using either the economic benefit approach, or the split-dollar loan approach.

Employer-owned policies are taxed using the economic benefit approach, which imputes term insurance costs plus any policy equity (i.e., cash surrender value available to the employee in excess of reimbursement owed to the employer).

Employee-owned policies are taxed using the split-dollar loan approach. Premiums paid by the employer are treated as a loan and income is imputed for any deemed interest.

Pension Protection Act of 2006

The PPA added Code Section 101(j), which provides that in the case of an employer-owned life insurance contract, the amount of death benefits excluded from gross income of an applicable policyholder under § 101(a)(1) (i.e., an employer) shall not exceed an amount equal to the sum of the premiums and other amounts paid by the policyholder for the contract unless:

  • certain notice and consent requirements are met; and
  • the insured is:
    • an employee within 12 months of death or is a director, a highly compensated employee or a highly compensated individual; or
    • the death benefits are paid to a family member, trust, or estate of the insured employee, or are used to purchase an equity interest in the applicable policyholder (employer) from a family member, trust or estate.


  • See Notice 2007-34 for rules on the application of Code Section 409A to split-dollar life insurance.
  • Notice 2008-42 provides that a modification of a split-dollar life insurance arrangement that does not entail any change to the life insurance contract underlying the arrangement will not be treated as a material change in the life insurance contract for purposes of Code Sections 101(j) and 264(f).
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