Split-dollar life insurance is a unique financial arrangement commonly used by businesses and individuals to share the costs and benefits of a life insurance policy. Under this setup, two parties—often an employer and an employee or two related parties—agree to split premium payments and policy benefits. This arrangement allows employers to provide valuable life insurance benefits as part of an employee compensation package, or help business owners collaborate on managing insurance costs and benefits.
There are two primary types of split-dollar arrangements recognized by the IRS: the endorsement method and the collateral assignment method.
The endorsement method involves the employer owning the life insurance policy and endorsing a portion of the death benefit to the employee or another party. The policy’s cash value is generally considered the employer’s asset. This method is typically used when the employer wants to provide an employee benefit.
The collateral assignment method sees the employee owning the policy but assigning a portion of the death benefit or cash value as collateral to the employer to secure premium payments. This method is common when the employee wants policy ownership but the employer helps with financing.
From a tax perspective, the IRS provides specific guidance outlined in IRS Notice 2002-8. It establishes rules regarding the valuation of the economic benefit received by the participant, including imputed interest rules when loans or premium financing occur. These rules are complex and have significant tax implications, so it’s important to consult a tax professional when considering or administering split-dollar life insurance arrangements.
Split-dollar life insurance can offer strategic tax advantages and flexible financial planning options, especially in business succession planning, employee retention, and estate planning. However, improper implementation or misunderstanding of IRS rules can trigger unexpected tax liabilities.
For individuals and businesses considering split-dollar life insurance, understanding the legal and tax framework is vital. The official IRS notice and reputable financial resources like Investopedia and Forbes provide valuable information to help you evaluate whether this arrangement aligns with your financial goals.
For further detailed IRS guidance, review IRS Notice 2002-8 directly here: IRS Notice 2002-8 PDF.
Explore our Life Insurance glossary article to understand related insurance terms and concepts.