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What is Split Dollar Life Insurance [How it Works]

split dollar life insurance
Insurance Quotes 2 Day Team

Written By Doug Mitchell

Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA.  Doug has spent close to 30 years in the insurance and financial planning industry and has held licenses to sell securities, long-term care insurance, health.  Doug is also a financial blogger addressing the topics of life insurance, annuities and retirement income planning.

Holly Mitchell  &

Holly Mitchell’s background in life insurance insurance goes back to 1985 when she worked for her father who was a New York Life agent. Holly has a marketing degree from Auburn University and has had a life insurance license since 2008. In addition to advising life insurance for customers all around the country, Holly is our website fact checker.

Rob Pinner   &

Rob Pinner is the founder and CEO of Pinner Financial Services servicing all 50 states. Rob started his insurance career in 2002.

Louis LaBash

Results-driven and innovative life insurance professional with 30 plus years of life insurance industry sales and marketing experience. Recognized as a pioneer in the field, leveraging phone and internet channels to exceed personal sales of over $100 million during the first decade of the 21st century. Creator of a highly effective intuitive IUL life insurance sales software that facilitated the sale of millions of dollars of indexed universal policies by numerous life insurance agents. Proven track record as a Managing General Agent (MGA), Life Agent, IUL Life Insurance Sales Software developer, and leading-edge creator of insurance marketing tools, educational content, and delivery systems.

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The most widespread form of life insurance is for personal use and usually protects a family financially if their loved one dies. Life insurance can also be used to cover the economic repercussions any business may see if a key person in the business died suddenly. 

Many businesses mitigate this need using split dollar life insurance which is an agreement created between at least two parties that will share the benefits and ownership of this permanent life insurance and its cash value component. Typically we see whole life or indexed universal life as the preferred policy type.

Split-dollar insurance contracts are typically used by companies to mitigate the financial risk that results when a key employee or key executive in the company dies or as a part of an executive compensation package.

How Split Dollar Life Insurance Works

Split-dollar life insurance is a type of insurance policy that is jointly owned by two people. The benefits of the policy are typically split between the two owners, with each owner receiving a share of the death benefit based on their investment in the policy. 

This type of arrangement can be beneficial for both parties involved, as it allows each person to share in the benefits of the policy while still maintaining some control over their own financial future.

How it Works for Employers and Employees

The arrangement can be structured in a number of ways, but typically the employer pays the premiums and the employee is the policy beneficiary. In some cases, the premiums may be deducted from the employee’s pay.

There are several advantages to a split-dollar life insurance arrangement for both employers and employees. For employers, it can be a way to attract and retain key employees, as well as provide them with valuable death benefits. For employees, it can provide financial security for their loved ones in the event of their death.

One of the main advantages of a split-dollar life insurance arrangement is that it can be structured to meet the specific needs of both the employer and employee. For example, an employer may want to provide coverage for a key employee who is essential to the business, but may not be able to afford to do so on their own. A split-dollar arrangement allows the employer to share the cost with the employee.

Although the life insurance that funds the split-dollar plan is generally straightforward there are five areas that must be agreed upon before instituting the plan:

  • Which party will be the Payor?
  • Which party will be the policy owner?
  • Who will be listed as beneficiaries?
  • How will the policy’s cash value and death benefit be divided between the parties?
  • What circumstances will result in the plan being terminated?

Using Split Dollar Life Insurance in Estate Planning

Split-dollar agreements can also be a great tool when used for estate planning because of the tax benefits that it provides to the insured and beneficiaries.

With a split-dollar life insurance policy, the premiums are paid by the policyholder and the beneficiary. The death benefit is then divided between the two parties. The main advantage of this type of policy is that the premiums are paid with after-tax dollars, so the death benefit is not subject to estate taxes.

Another advantage of split-dollar life insurance is that it can be used to create an inheritance for your beneficiaries without affecting your estate tax exemption. For example, if you have a $5 million estate and you want to leave $2 million to your children, you could purchase a $2 million split-dollar life insurance policy. The premiums would be paid with after-tax dollars, so your estate would still qualify for the estate tax exemption.

Moreover, by using an irrevocable life insurance trust, the contracts that are created will protect the life insurance proceeds from estate taxes.

If you are considering using split-dollar life insurance in your estate planning, talk to an advisor here at Ogletree Financial to see if it makes sense for your situation.

The Pros and Cons

When it comes to split-dollar life insurance, there are pros and cons to consider. On the one hand, this type of insurance can be a great way to provide financial security for your loved ones in the event of your death. On the other hand, there are some potential drawbacks you should be aware of before making a decision.


One of the biggest advantages is that it can be used to help fund a wide range of financial goals. For example, if you have young children, you may want to use it to help pay for their education. 

Or, if you are nearing retirement, you may want to use split-dollar life insurance to help supplement your retirement income.

Another advantage of split-dollar life insurance is that it can provide significant tax advantages. In most cases, the death benefit from a life insurance policy is tax-free. This means that your beneficiaries will not have to pay any taxes on the money they receive from your policy. This can be a huge advantage, especially if your beneficiaries are in a higher tax bracket than you.


Because of the multiple options and the flexibility of a split-dollar insurance plan, it can be confusing to individuals, employees, and employers.

As far as income tax implications, the parties involved will generally need the help of a CPA to complete the reporting required by the IRS.


author avatar
Doug Mitchell, CLU Independant Advisor
Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA. Doug has spent almost 30 years in the life insurance industry and has also held licenses to sell securities, long-term care insurance and home and auto insurance. Doug is a Top of the Table Million Dollar Round Table member (MDRT).  MDRT is a global, independent association of the world's leading life insurance advisors.  For two years, Doug served as President of the Auburn Opelika Association of Financial Advisors and has been a member of the Million Dollar Round Table. He obtained Life Millionaire status at Horace Mann Insurance Company and was awarded the Life Agent of the Year Award. Later in his career with New York Life he was an Executive Council Member. Doug currently serves as President of Ogletree Financial, a managing general agency serving life insurance agents and clients in all parts of the United States. Today, Doug’s main focus is servicing 1000s of policyholders and growing the agency through the reach of