Split-dollar arrangement

A split-dollar arrangement isn't a type of policy but a way of sharing one. Two parties, usually a business and an executive, or sometimes family members and a trust, agree how to divide the premium cost and the policy's benefits. The party that pays most of the premium typically recovers its outlay from the cash value or death benefit, and the other party's beneficiaries receive the rest.

Federal tax treatment follows Treasury regulations finalized in 2003, which set out two regimes. Under the economic benefit regime, usually when the employer owns the policy (the endorsement method), the employee is taxed each year on the value of the life insurance protection received. Under the loan regime, typically when the employee owns the policy and assigns it to the employer as collateral, the employer's premium payments are treated as loans, and below-market interest creates imputed income. Hypothetically, an employer that pays $50,000 a year for 10 years might be repaid $500,000 from the death benefit, with the rest going to the executive's family.

Split-dollar plans are complex. Public companies generally avoid loan-regime plans for executives because the Sarbanes-Oxley Act bars personal loans to directors and executive officers, and ending a plan can trigger tax. See split-dollar life insurance and section 162 executive bonus plans.