Business · 5 min read · Updated November 10, 2026

Split-dollar life insurance basics

Illustrative examples, education not advice.

In plain words

Split-dollar is not a type of insurance. It is an agreement about who pays for a life insurance policy and who gets what from it. Most often, a business helps an owner or key employee pay for a permanent life policy. The business gets its money back later, and the employee’s family gets the rest of the death benefit.

It can also be used within families, for example when a parent helps fund a policy owned by a trust for their children.

The tax rules, set out in federal regulations issued in 2003, sort most split-dollar arrangements into two regimes, depending mainly on who owns the policy.

The two regimes

	Economic benefit regime	Loan regime
Who usually owns the policy	The business (often called endorsement split-dollar)	The employee or their trust (often called collateral assignment split-dollar)
How the business pays	Pays premiums and keeps rights to cash value or premiums repaid	Lends the premiums to the employee, secured by the policy
How the employee is taxed	Each year on the value of the life insurance protection they receive, based on IRS tables, plus any other benefits	Interest on the loan is either paid, or treated as imputed income if below the IRS applicable federal rate
What the business gets back	Its share at death or when the arrangement ends	Loan repayment, often from the death benefit or cash value
Common use	Simpler, often for younger employees or shorter arrangements	Often for owners and family trust planning

How it helps real people

Makes permanent coverage affordable for a key person who could not pay large premiums alone.
A benefit to attract and keep talent, sometimes called a “golden handcuff” when the business gets its money back if the person leaves early.
Business recovers its outlay, unlike a bonus that is simply spent.
Funds family and estate goals, such as cash for heirs or estate liquidity, with help from the business.
Can work alongside a buy-sell plan or key person cover.

A worked example

Illustrative. Grace, 45, is fictional and the chief operating officer, with a 20% ownership stake, of a regional logistics company. The company wants to reward and keep her.

The company and Grace enter a loan regime arrangement:

An irrevocable trust for Grace’s children owns a $3 million permanent life policy on her.
The company lends the trust $40,000 a year for premiums, for 10 years, secured by the policy.
The loans carry interest at the applicable federal rate. Grace’s bonus covers the interest so the trust does not have to.
At Grace’s death, the company is repaid its $400,000 in loans plus any unpaid interest from the death benefit. The trust receives the remaining death benefit for her children.
If Grace leaves early, the agreement sets out how and when the loans are repaid.

These figures are illustrative only and not a policy illustration or legal design.

Who it’s for

Owners and key executives of profitable private businesses.
Businesses that want to provide a valuable benefit but recover the cost over time.
Families using a trust where premiums are too large for annual gifting alone.
Situations where a permanent need for coverage exists and cash flow can support it.

Who it’s not for

Public companies generally cannot make personal loans to directors and executive officers, which limits the loan regime there.
Businesses with uncertain cash flow, since premiums run for years.
Employees who need simple, short-term coverage. Group or term insurance may fit better.
Anyone uncomfortable with complexity and ongoing administration.

Risks and trade-offs

Complexity and cost. Legal agreements, annual tax reporting and policy reviews are required.
Rising economic benefit cost. In the economic benefit regime, the employee’s taxable amount rises with age, which can make long arrangements expensive.
Exit planning. Many arrangements need a plan to end, called a “rollout,” for example by repaying the business from cash value. If the policy underperforms, there may not be enough cash value.
Policy performance risk. Projections for dividends or index credits are not guaranteed.
Deferred compensation rules. Some split-dollar arrangements can fall under Section 409A, which has strict timing rules and penalties.
Ownership changes. A sale of the business, a divorce or a departure can complicate the arrangement.

Common mistakes

No written agreement, or one that does not match how the arrangement is actually run.
No exit strategy, leaving the business and employee stuck with a growing cost.
Ignoring annual reporting, such as imputed income on W-2s.
Using aggressive policy assumptions that make the arrangement look better than it may perform.
Forgetting estate planning. If the employee owns the policy personally, the death benefit may be in their estate.

FAQs

Is split-dollar a tax shelter?

No. It is a way to share costs and benefits. The 2003 regulations closed many older strategies, and arrangements are taxed under one of two regimes.

How is split-dollar different from a Section 162 bonus?

In a 162 bonus plan, the business pays a bonus the employee uses for premiums, and generally gets nothing back. In split-dollar, the business usually recovers its outlay.

Can a family use split-dollar without a business?

Yes. “Private” split-dollar between a parent and a trust is used in some estate plans. It needs careful drafting.

What happens to my plan if I leave the company?

It depends on the agreement. Often you must repay the business, or the policy is transferred subject to the business’s interest.

Can a split-dollar policy be term insurance?

It is usually permanent insurance, because the arrangement relies on cash value or death benefit to repay the business.

Your next step

Talk to a strategist about whether a split-dollar arrangement or a simpler bonus plan fits your business and your key people.

Education, not advice. Examples are illustrative. VeraLife.ai is not a registered investment adviser, broker-dealer or insurance agency.