Split dollar is not a type of policy. It is a written agreement where a business and an employee (or a family and a trust) share the premiums and the benefits of one permanent life policy, usually so the business gets its money back later. Under regulations finalized in 2003, ownership picks the tax rules: if the business owns the policy, the employee is taxed each year on the value of the economic benefit (roughly the cost of their share of the death benefit); if the employee owns it, the business's premium payments are treated as loans with interest at the IRS rate.
We are licensed insurance brokers, not CPAs or attorneys. Treat the tax and legal points on this page as general education, and confirm them with your own CPA or attorney before acting.
On this page
The basic idea
A key employee needs a large permanent policy. The business has the cash, the employee does not, and the owner does not want to simply give the money away. Split dollar lets the business pay most or all of the premium while keeping a right to be repaid, usually from the policy's cash value or death benefit. The employee gets coverage for their family at a fraction of the out-of-pocket cost. When the agreement ends, often at retirement or a set year, the business is repaid and the employee keeps the rest of the policy.
The same structure is used outside of business, where a family member or a family company advances premiums for a policy owned by an irrevocable trust. That version is called private split dollar.
The two tax regimes
Treasury regulations finalized in September 2003 (Treas. Reg. 1.61-22 and 1.7872-15) apply to arrangements entered into or materially modified after September 17, 2003. They use ownership as a bright line:
| Economic benefit regime | Loan regime | |
|---|---|---|
| Who owns the policy | The business (usually an endorsement arrangement) | The employee or their trust (usually a collateral assignment arrangement) |
| How the business is protected | It owns the policy and endorses part of the death benefit to the employee's beneficiary | The employee assigns the policy back to the business as collateral for the loans |
| What the employee is taxed on | Each year, the value of the current life insurance protection they receive (using IRS Table 2001 rates or qualifying carrier term rates), plus any other benefits like access to cash value | Imputed interest on below-market loans, at the applicable federal rate, unless the employee actually pays the interest |
| Good fit | Younger insureds, where the annual economic benefit cost is low | Larger premiums, longer horizons, when interest rates are moderate |
A C corporation owns a $2,000,000 policy on its 45-year-old vice president. The corporation will recover what it paid in premiums from the death benefit; the vice president's beneficiary receives the rest. Each year, the vice president includes in income the term cost of the death benefit his family would receive, a few thousand dollars at his age. The corporation gets no deduction for premiums because it is the owner and a beneficiary.
Plan the exit before you start
Split dollar agreements that ran fine for years can turn expensive at the end. In the economic benefit regime, the annual taxable cost rises every year with age, and transferring the policy to the employee can be a taxable event if the cash value exceeds what the business is owed. In the loan regime, accumulated loans must be repaid from the policy or other assets. A good agreement spells out how and when the business gets repaid and models the policy at conservative crediting rates, not just the illustrated rate.
Who uses split dollar today
- Closely held C corporations that want to provide large permanent coverage to a key executive or owner and recover the cost later.
- Families with an irrevocable trust that need to get large premiums into the trust without using up gift tax exemption.
- Buy-sell planning, where the business helps owners carry cross-purchase policies.
Publicly traded companies largely abandoned loan-regime split dollar for executives after the Sarbanes-Oxley Act banned most loans to directors and executive officers. For a small business, the simpler alternatives are a Section 162 bonus or a REBA. Split dollar is worth the extra complexity when the business genuinely wants its money back.
Frequently asked questions
Is split dollar a kind of life insurance policy?
No. It is an agreement about how the premiums and benefits of an ordinary permanent policy are shared. The policy itself is usually whole life, universal life or indexed universal life.
Can an S corporation or LLC use split dollar?
Yes, though the tax results differ when the insured is an owner, because payments can be treated as distributions rather than compensation. Have your CPA and attorney design it for your entity.
What happens to a split dollar arrangement when the employee leaves?
It depends on the agreement. Typically the business is repaid from the policy's cash value, and the employee can keep the policy by paying off the balance or taking a reduced policy. The agreement should spell this out from the start.
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Written by Erik Moran
Erik co-owns Moran Insurance Group with Amanda Moran and handles the agency's life insurance cases, from key person and buy-sell coverage to trust-owned policies. He works alongside clients' CPAs and attorneys, who make the tax and legal calls. More about Erik.
Sources
Moran Insurance Group is a licensed insurance agency. Our brokers are not CPAs, attorneys or tax advisors, and nothing on this page is tax, legal or investment advice. Tax figures and rules reflect our understanding as of October 2026 and can change. Coverage is subject to carrier underwriting and state availability. Confirm anything tax or legal with a licensed CPA or attorney before you act on it.