Split Dollar Life Insurance: How it Works

Split-dollar life insurance isn’t an insurance product or a reason to buy life insurance. Split dollar is a strategy that allows the sharing of the cost and benefit of a permanent life insurance policy. Any kind of permanent life insurance policy that builds a cash value can be used. 

What Is Split Dollar?

Most split dollar plans are used in business settings between an employer and employee (or corporation and shareholder). However, plans can also be set up between individuals (sometimes called private split dollar) or by means of an Irrevocable Life Insurance Trust (ILIT). This primarily focuses on arrangements between employers and employees; however, many of the rules are similar for all plans.

In a business setting, split-dollar can be used in a variety of different ways. For example, an employer may require key person insurance on an executive and the executive might want a tax-sheltered investment. The employer and the executive could enter into a split-dollar arrangement where the employer pays for and owns the insurance benefit on the life of the executive and the executive pays for and owns the cash value component of the policy. The beneficiary of the level death benefit is the employer, while the beneficiary of the cash value is designated by the executive (his or her spouse, for example).