Navigating the intricate world of personal finance can be a little daunting at times, especially when you’re trying to decipher more complex schemes. Among them is a strategy known as the Split Dollar Plan. A Split Dollar Plans is an agreement, typically between an employer and an employee, where a life insurance policy’s premium, cash value, and death benefits are split. The primary appeal here is the versatility it offers – the plan can be structured either as a loan or an endorsement arrangement.

Split Dollar Plans Insurance  -

What are Split Dollar Plan

In simple terms, a Split Dollar Plan is a deal, often between an employer and an employee. This agreement splits the premium, cash value, and death benefits of a life insurance policy. What makes it appealing? Flexibility! The plan can take the form of a loan or an endorsement deal. This adaptability makes it a unique tool to tackle various financial challenges.

Split dollar plans have remained a viable tool for businesses seeking to offer unique benefits to key employees.

Split dollar plans have two primary structures:

  1. Economic benefit regime
  2. Loan regime.

Lets dive into each of these types in detail.

Economic Benefit Regime

With this arrangement, the employer pays the premium for the employee’s life insurance policy. What’s the catch? The employee will need to count the economic benefit (the life insurance coverage cost) as taxable income. A notable pro of this regime is the simplicity of tax handling. The cons? The possible spike in taxable income might be a concern for some.

The value of the economic benefit is determined using the IRS’s Table rates, which depend on the age of the employee and the amount of insurance protection.

To visualize this, let’s examine a few examples of these rates:

AgeCost per $1000 of Protection (2001 rates)

Loan Regime

On the flip side, we have the Loan Regime. Here, the employer lends the premium to the employee, who will then repay, usually via policy’s death benefits. The pros here include better control for the employee and potentially tax-free death benefits. But, beware of the cons – the complexity of tax implications and potential tax liabilities in certain scenarios.

However, it’s not all sunshine and rainbows. If the loan is deemed to be below-market (i.e., the interest rate is below a certain threshold set by the IRS), the employee could be taxed on the loan interest.

The Annual loan interest rates as of May 2023 are as follows:

Term of LoanApplicable Federal Rate (AFR)
Short-term (0-3 years)3.26%
Mid-term (3-9 years)2.71%
Long-term (more than 9 years)2.82%

Advantages and Disadvantages of Split Dollar

Split dollar plans offer unique benefits to key employees that aren’t available through other plans. Let’s unravel the unique appeal and drawbacks of these plans.


  • Cost Sharing: Split dollar plans offer a unique cost-sharing mechanism, where both the employer and employee contribute towards the premium. This shared cost model often results in lower out-of-pocket expenses for key employees, a feature that isn’t typically available in other executive benefit plans.
  • Life Insurance Plus Compensation: A split dollar plan offers dual benefits – it’s not just a life insurance policy but also a form of compensation. It’s a win-win, providing financial protection for the employee’s family and serving as a part of the employee’s comprehensive compensation package.
  • Retention Tool: Split dollar plans can be a cornerstone of a company’s retention strategy. They act as golden handcuffs, creating a powerful incentive for key employees to remain with the company for the long term.
  • Estate Planning Benefits: Split dollar plans can be an excellent tool for estate planning,. When arranged properly, the death benefit proceeds from a split dollar plan can pass to the employee’s beneficiaries free of income and estate tax, providing a financial safety net for future generations.
  • Flexibility: Like the versatility of a Swiss Army Knife, split dollar plans can be tailored to fit a variety of needs. They can be structured in numerous ways, allowing for customization based on the specific needs of the employer and the employee.


  • Costly for Employers: While split dollar plans are generally more affordable for employees due to the cost-sharing arrangement, they can be relatively costly for employers who shoulder a significant portion of the premium payments.
  • Limited Availability: Split dollar plans are not available to all employees. They’re typically reserved for key employees, which may lead to feelings of inequality within an organization.
  • Tax Implications: The taxation of split dollar plans, particularly under the Loan Regime, can be complicated. Unlike a straight salary or bonus, which has clear tax implications, split dollar plans may lead to unforeseen tax liabilities if not properly structured.

The unique combination of benefits offered by split dollar plans positions them as a compelling option for companies seeking to reward and retain their most valuable players – their key employees.

Alternative to Split Dollar Insurance Plan

There are few alternative for Employers to look into for Split Dollar Insurance plan:

  • Executive Bonus Plan (Section 162)
  • Group Carve-Out Plan
  • Non-Qualified Deferred Compensation (NQDC) Plan

Here’s a quick comparison table:

Split Dollar PlanExecutive Bonus Plan
(Section 162)
Group Carve-Out Plan
Cost-Sharing FeatureYesNoNo
Cost for EmployerShared with EmployeeBorne by EmployerBorne by Employer

Wrapping Up

Split dollar life insurance plans, while complex, offer a unique set of advantages. They can be a boon to employers seeking to provide attractive benefits to key employees and to employees looking for robust life insurance coverage.

The journey through the landscape of split dollar plans has been both intriguing and enlightening. Whether you’re an employer seeking competitive advantages, or an employee considering your insurance options, split dollar life insurance plans offer a compelling, though complex, option.

That’s a wrap! Share your thoughts or experiences with split dollar plans in the comments below or on social media, and keep the conversation going!

Frequently Asked Questions (FAQs)

Yes, split dollar life insurance is considered a fringe benefit. It’s a special perk that’s often reserved for a select few – the key employees. However, it’s not a one-size-fits-all benefit. It must be carefully tailored to fit the needs of the company and the employee, and its value can vary based on the specifics of the arrangement.

In general, the tax implications depend on whether the plan falls under the Economic Benefit Regime or the Loan Regime. Under the Economic Benefit Regime, the IRS only taxes the employee on the “economic benefit” they receive, which is typically less than the premiums the employer pays. Under the Loan Regime, the IRS treats the premiums paid by the employer as loans to the employee. If the loan is interest-free or below-market interest rate, the IRS may impute income to the employee for the forgone interest.

Split dollar life insurance plans are non-qualified plans. This means they do not need to meet the stringent guidelines set forth by the Employee Retirement Income Security Act (ERISA) and do not offer the same tax benefits that qualified plans do.

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