Introduction
Split-dollar life insurance is a funding arrangement, not a product type and not a single "IRS-approved plan" you buy off a shelf. Two parties - often an employer and an employee, but not always - put a permanent life insurance policy in place and use a written agreement to allocate rights, premium responsibility, cash-value interests, and death-benefit shares.
This guide is a high-level overview of what split-dollar is, how the two main federal tax regimes are described in the regulations, and what business owners should understand before considering the idea with their own advisors. It is educational only. It is not tax, legal, employee-benefit, or estate-planning advice, and it does not promise a particular tax result.
Key Takeaways
- Split-dollar is an arrangement documented in writing; it is not a life insurance product by itself
- Federal tax rules describe two primary regimes: the economic benefit regime under 26 CFR 1.61-22 and the loan regime under 26 CFR 1.7872-15
- There is no universal percentage split of premiums, cash value, or death benefit - the documents control
- An employer may advance significant cash over time; this is not a free or costless benefit
- Termination and rollout follow the agreement, not a fixed industry calendar or automatic end date
- Entity type, tax treatment, and any employee-benefit implications are fact-specific and belong with a CPA and attorney
- After counsel structures the arrangement, a licensed agent can help explore the life insurance policy and funding component - not design the tax regime, draft the agreement, or promise results
What Is Split-Dollar Life Insurance?
Split-dollar is a way two parties share economic interests in one permanent life insurance policy. The arrangement typically addresses:
- Who owns the policy (or holds which rights)
- Who pays which premiums, and on what terms
- How cash value and death benefit are allocated
- What happens if employment ends, the arrangement is rolled out, or someone dies
Those answers live in the split-dollar agreement and related collateral or endorsement paperwork - not in a one-size-fits-all product brochure. Different permanent designs can sit under the arrangement; the arrangement itself is product-neutral at a high level.
Split-dollar is also not a qualified retirement plan. Whether a given design has employee-benefit-law implications is a counsel question for the facts of that design. This article does not claim ERISA never applies, and it does not treat split-dollar as a substitute for a 401(k) or similar plan.
What the Written Documents Usually Cover
A well-drafted package generally addresses ownership, premium funding, collateral or endorsement mechanics, termination and rollout, repayment or recovery of employer advances where relevant, and reporting expectations the parties' advisors identify. None of those items is automatic. Premium payments are not "automatically deductible" simply because a split-dollar label is used - deductibility and income inclusion are tax questions for the CPA.
The Two Federal Tax Regimes (High Level)
Treasury regulations describe how certain split-dollar arrangements are analyzed for federal income tax purposes. Two regimes are commonly discussed:
| Topic | Economic benefit regime | Loan regime |
|---|---|---|
| Core idea | Value of life insurance protection (and related rights) may be treated under economic-benefit principles | Employer advances or loans of premium dollars may be analyzed under below-market loan rules |
| Primary regulation (reference) | 26 CFR 1.61-22 | 26 CFR 1.7872-15 |
| Ownership pattern (often, not always) | Employer may own or control the policy; employee may receive endorsed protection | Employee (or other party) often owns the policy; employer advances are documented as loans |
| What this page does not do | Teach Table 2001 math or claim one table is the whole story | Teach AFR calculation or DIY interest design |
These are tax-regime frameworks, not "IRS-approved products" or plan types you purchase as a catalog SKU. Which regime applies, how much income is imputed, and how interest is handled are determinations for the parties' tax advisors based on the documents and facts.
Economic Benefit Regime (High Level)
Under economic-benefit concepts, one party may provide life insurance protection or related economic value to another. The regulations under 26 CFR 1.61-22 address how that value can be measured and reported. Measurement methods, including tables or other prescribed approaches the IRS and regulations contemplate, are technical. Reducing the entire regime to "just use Table 2001" oversimplifies the rules.
What business owners should understand at a high level:
- Someone may be taxed on the value of protection or other economic benefits received under the arrangement
- Ownership, endorsement rights, and cash-value access in the documents drive the analysis
- Annual costs and reporting can change over time as ages, amounts, and rights change
- Transfer or rollout of a policy can create separate tax events - again, CPA territory
This page does not calculate economic benefit for any reader and does not recommend a measurement method.
Loan Regime (Client-Aligned Overview)
Under many loan-regime designs discussed in practice:
- The employer advances or lends premium amounts (or related funds)
- The advances are documented as loans (or series of loans)
- The executive or other borrower often owns the policy
- Repayment is expected under the agreement - typically from cash value, death benefit, or other sources the documents specify
- Federal below-market loan rules can apply; interest, imputed interest, and related reporting are technical
The split-dollar loan regulations at 26 CFR 1.7872-15 address how certain life insurance premium loans are treated. Applicable Federal Rates and related interest concepts may matter in a real design - but AFR selection, interest modeling, and imputed-income calculations are not DIY exercises and are not something a life insurance agent should run as tax advice. The CPA and attorney own that work.
No Universal Percentage Split
Marketing language sometimes implies a fixed "50/50" or other stock split of premiums or benefits. That is not how compliant design works. Allocations of premium responsibility, cash value, and death benefit are whatever the written agreement says, within the bounds of tax and other law the advisors apply. There is no universal industry percentage.
Employer Cash Is Real Cash
Even when an employee does not write the premium check personally, the employer may advance significant cash over the life of the arrangement. Split-dollar is not a free benefit. Cash-flow capacity, opportunity cost, and recovery of advances at termination are business decisions, not marketing slogans.
Termination and Rollout Follow the Documents
Arrangements end when the documents say they end - for example at death, at a negotiated rollout, at employment separation under defined terms, or at another contractual trigger. There is no fixed industry date and no automatic termination schedule that applies to every plan. Tax consequences of a transfer, loan repayment, or release of collateral should be modeled with the CPA before a rollout, not after.
Entity Type Is Fact-Specific
How an S corporation, C corporation, partnership, LLC, or other entity experiences income inclusion, deduction timing, or shareholder-level effects depends on the facts. This guide does not limit split-dollar to C corporations and does not map tax results by entity type. Those questions belong with the business's CPA and counsel.
Cash Value, Product Choice, and Related Planning Paths
Permanent life insurance used in some split-dollar designs may build cash value that can matter to the economics of collateral, repayment, or a later transaction under the written arrangement. Cash value is not a guarantee of any particular outcome.
Where policy loans are relevant, they accrue interest and can reduce available cash value and the death benefit. Excessive borrowing or underfunding may contribute to lapse, which can create tax consequences. Loan-to-value limits, rates, repayment provisions, and other terms vary by carrier and policy. Cash value is not a bank account, pension, or guaranteed income source.
Product selection - whether whole life, universal life, indexed designs, or another appropriate permanent policy - is separate from the federal tax-regime analysis and should remain product-neutral until the attorney and CPA have established the arrangement's legal and tax framework.
Businesses sometimes compare split-dollar with other executive-oriented funding ideas. Those are different structures with different tax and documentation paths:
- IRS Section 162 executive bonus plan concepts
- Executive bonus plan structure
- Restricted executive bonus arrangement (REBA)
- IUL-wrapped Section 162 plan reading - carefully, as one funding approach discussion, not as a definition of split-dollar
None of those pages replaces a CPA or attorney on tax or legal design. For the insurance-funding component after the professional structure has been established, see business life insurance.
Estate, Gift, and Non-Employment Uses (Out of Scope Here)
Split-dollar concepts can appear outside a pure employer-employee setting, including private or family contexts. Estate and gift tax issues, trust ownership, and multi-generational designs require specialized counsel. Those topics are outside the scope of this article. This page does not walk through ILIT implementation, estate freezes, or gift-tax mechanics, and it does not market split-dollar as an estate product.
What to Understand Before You Consider Split-Dollar
Before treating split-dollar as a live option, most owners benefit from clarity on:
- Business goal - retention, selective benefit funding, owner coverage, or something else - stated without assuming a tax outcome
- Cash capacity - willingness and ability to advance premiums over time, and how recovery would work
- Documents-first mindset - no arrangement without a written agreement reviewed by counsel
- Tax and reporting lane - CPA ownership of regime analysis, imputed income, interest, and filing positions
- Other legal or compliance considerations - counsel should identify any additional legal or employee-benefit requirements that apply to the actual arrangement and parties.
- Insurance lane after legal and tax structure - policy and funding exploration should follow once the attorney and CPA have established the intended framework.
Gary's Role: Policy and Funding After Counsel Structures the Plan
Gary Cosby is a licensed life insurance agent, licensed in all 50 U.S. states. After the business's attorney and CPA structure the arrangement - tax regime posture, agreement terms, ownership, and reporting expectations - Gary can help explore the life insurance policy and funding component in coordination with those advisors.
Gary does not:
- Design or elect the federal tax regime
- Calculate or set AFR or imputed interest
- Draft the split-dollar agreement or collateral documents
- Determine imputed income or filing positions
- Provide estate or gift planning
- Promise tax results, deductions, or "golden handcuff" outcomes
His lane is insurance: product options appropriate to a counsel-defined need, underwriting, and funding mechanics - always alongside the CPA and attorney.
Next Step
- Talk with your CPA and attorney first about whether a split-dollar concept fits your facts and how it should be documented.
- If they support moving forward and a permanent life policy is part of the design, explore the insurance-funding component through business life insurance with Gary Cosby.
Primary regulation references for advisor-level reading: 26 CFR 1.61-22 and 26 CFR 1.7872-15. IRS publications and your advisors' current guidance may add context; this article does not replace them.
Frequently Asked Questions
What is split-dollar life insurance?
It is a written funding arrangement - not a product type - in which two parties allocate premium responsibility, policy rights, cash-value interests, and death-benefit shares on a permanent life insurance policy. The documents define the deal.
What are the two main tax regimes?
At a high level, federal rules discuss an economic benefit regime (see 26 CFR 1.61-22) and a loan regime (see 26 CFR 1.7872-15). These are tax frameworks, not IRS product catalogs. Which regime applies is a CPA determination.
Does the employer always avoid paying meaningful premiums?
No. Employers often advance substantial premium dollars. Split-dollar is not a free benefit. How costs, repayment, and recovery work is set in the agreement and should be modeled with advisors.
Is there a standard 50/50 premium split?
No. There is no universal percentage split. Allocations are whatever the written arrangement provides, subject to applicable law.
Are premiums automatically tax-deductible?
No. There is no automatic premium deduction merely because an arrangement is labeled split-dollar. Deductibility and income inclusion are fact-specific tax questions for the CPA.
Is split-dollar only for C corporations?
No. Entity type effects are fact-specific. S corporations, partnerships, LLCs, and other forms may be involved in real-world designs; tax results differ and require professional analysis.
Does ERISA never apply?
This article does not say ERISA never applies. Split-dollar is not a qualified retirement plan, but employee-benefit implications depend on structure and facts. Counsel should evaluate that question; do not assume a categorical exemption.
Can Gary design the tax regime or draft the agreement?
No. Gary explores the life insurance policy and funding piece after the attorney and CPA structure the arrangement. He does not design tax regimes, set AFRs, draft agreements, compute imputed income, do estate planning, or promise tax results. Start insurance-funding conversations via business life insurance once counsel is engaged.
