Split-Dollar Life Insurance: Ownership, Costs and Exit

Split-dollar life insurance combines an insurance policy with an agreement about its costs and benefits. An employer and employee may use it as part of an executive benefit. Before considering a policy, establish who owns it, which rights each party receives, and what must happen when the arrangement ends.

Start with ownership and the written agreement

New York Life explains the policy and agreement as separate parts of the arrangement. The agreement should identify the parties’ rights rather than leaving them to assumptions about the phrase “split dollar.”

Sharing does not necessarily mean equal halves. Ask how any amount due to the business is determined and how that affects the employee’s or family’s interest.

Have the tax approach identified before funding

IRS Publication 525 describes economic-benefit and loan rules for split-dollar arrangements. Under the first approach, the policy owner is treated as providing insurance protection and other taxable benefits to a nonowner. Under the loan approach, premium funding by the nonowner is treated as lending to the policy owner. The IRS describes the approaches as mutually exclusive.

Your advisors should establish the applicable treatment, interest questions, taxable benefits and reporting for the actual agreement. Do not infer the result from a marketing label or apply an employee example automatically to a shareholder, partner or trust.

Review the policy’s funding and cash values separately

Guardian’s explanation discusses policy funding, ownership and loan effects. A policy and its illustration still need review even when the agreement’s purpose is clear. Identify required premiums, guaranteed and nonguaranteed values, charges and the assumptions behind projected cash value.

If an exit plan relies on policy cash value, compare the amount available with the obligation to be settled. Policy loans and withdrawals can reduce cash value and death benefits. An illustration does not establish that future values will repay a stated amount by a particular year. Ask what happens if premiums stop or values develop less favorably than illustrated.

Discuss the exit before the arrangement starts

Review who keeps the policy, how repayment or recovery is calculated and which documents must be completed at an exit. Confirm the effect of the employee leaving sooner than expected. A possible future transfer, forgiveness or repayment should be reviewed with the parties’ tax and legal advisors before anyone relies on it.

Compare the business purpose with other life-insurance arrangements

An executive bonus arrangement generally involves bonus compensation used for an employee-owned policy. Split-dollar adds an agreement allocating policy costs and benefits, often including a recovery or repayment interest. They require different analysis.

Key person coverage addresses the business’s loss if an important person dies. Identify whether your goal is company protection, an employee benefit or both; one label should not stand in for the ownership and beneficiary decisions.

Bring the business goal and proposed terms to the review

Start with the business entity, intended insured, ownership relationship, benefit goal, funding budget and proposed exit terms. If documents or an illustration already exist, have them available for the appropriate advisors to review.

First Freedom Life can discuss the insurance-policy portion and available coverage choices while your tax and legal professionals evaluate the agreement. Coverage remains subject to insurer underwriting, approval and applicable product terms. An insurance inquiry is a starting point for reviewing those questions, not a completed split-dollar arrangement.