Life insurance can be a foundational financial planning tool for many, helping to protect loved ones and, with the right policy type, build cash value. This is why some employers offer a workplace benefit called split-dollar life insurance. Under these agreements, employers pay premiums to make it easier for employees to gain coverage. Such a benefit can attract and retain key employees, making it an excellent potential investment for many employers. This article will explain how split-dollar life insurance works, its benefits, and a few alternative policy options.
Split-dollar life insurance is a contract where an employer and employee agree to share a life insurance policy’s costs and benefits. This agreement specifies each party’s rights and responsibilities for a shared policy in a written contract. It includes the agreement's term length, how the agreement ends, and the employee’s responsibilities for maintaining coverage. It can also detail how coverage can change if the employee leaves the company or fails to hit agreed-upon targets. Companies often use split-dollar life insurance to help attract and retain important or high-level employees, such as executives or managers. 1
The employer or employee can each own the life insurance policy. The policy is never jointly owned. Each arrangement has a unique name and differs in features and operation: 1
In an economic benefit regime, or economic benefit arrangement, the employer owns the policy. They pay policy premiums and decide on the employee’s rights and benefits regarding the policy, including the death benefit portion and access to cash value. Meanwhile, the employee in the agreement designates beneficiaries to receive some of the death benefit payout if the employee passes away while the policy is active. Employees may be taxed on the economic value of this policy, which is calculated each year by the IRS. 2
Under a loan regime, the employee owns the life insurance policy, but the employer pays policy premiums. For tax purposes, premium payments are treated as loans to the employee each year. The employer must charge a sufficient interest rate based on the Applicable Federal Rate (AFR). 2 However, this allows for flexibility in loan structure. The employer can structure this as a term or demand loan. To make the agreement fair for both sides, the employee gives the employer an interest in the policy’s death benefit and cash value through a collateral assignment agreement. This agreement restricts certain aspects of the policy. A loan regime can be more complicated than an economic benefit regime due to the complexities of structuring and managing the loan and its tax implications.
One of the most helpful aspects of split-dollar life insurance is that your employer covers the cost of premiums. This can make it easier to get a basic level of coverage and make larger coverage amounts more accessible. For employers, split-dollar life insurance can be an attractive benefit for persuading high-quality candidates to sign on or current employees to continue working for their company.
Loan regime agreements may come with low interest rates, especially if the economy’s prevailing interest rates are low relative to the AFR. These rates can be lower than rates obtainable through traditional borrowing methods. This gives employees a more affordable way to get coverage without paying now and repay the debt they owe later. It also lets them maximize their cash value since they don’t have to pay the premiums necessary to grow coverage right away. Additionally, employers can more easily offer this benefit to employees while fitting it into company budgets.
Employers generally can’t take tax deductions for premiums paid under a split-dollar agreement. However, they may be able to deduct cash value provided to an employee. Meanwhile, the employee may not owe taxes on the interest if it is at or above the AFR.
If the employee passes away during the policy term, the death benefit is paid out to terminate the agreement. First, the employer recoups any premiums paid on the insured’s behalf, cash value, or loan amounts owed. The remainder of the death benefit is paid to the employee’s beneficiaries.
If the agreement term ends, coverage expires. In this case, both parties settle any remaining loans or unpaid premiums to terminate the policy. Under a loan regime, collateralized restrictions are lifted. In an economic benefit regime, the employee may obtain policy ownership depending on the parties' choice and the agreement. A policy transfer may be taxable to the employee and tax-deductible to the employer.
Parties can agree to terminate the policy before its term ends for any reason the contract allows, such as changes in financial circumstances. The employer and employee would then negotiate to settle any outstanding premiums or loans to end the policy.
Split-dollar life insurance isn’t for everyone. Consider the following factors when determining if you should look for a role that offers it or attempt to negotiate it as part of your benefits:
If split-dollar life insurance isn’t right for you, consider some alternatives:
Split-dollar life insurance can be an excellent agreement for both parties. Employees save money on life insurance coverage, while employers have an attractive benefit that can sell employees on accepting an offer with them. However, these agreements can become complex and may require careful negotiation to achieve a fair agreement on both sides. If split-dollar life insurance isn’t right for you, Aflac offers alternative life insurance options. Speak with an agent today to learn more about our insurance policies and get a quote.
Explore your life insurance options.
2 MarketWatch - Split-Dollar Life Insurance: What It Is and How It Works (2024). Updated February 1, 2024. https://www.marketwatch.com/guides/insurance-services/split-dollar-life-insurance/. Accessed April 10, 2024.
Coverage underwritten by American Family Life Assurance Company of Columbus. In New York, coverage is underwritten by American Family Life Assurance Company of New York.
68000: In Arkansas, Idaho, Oklahoma, & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. In New York, NY68100-NY68400. In Virginia, Policies ICC0965JTO & ICC0965JWO. 65000: In VA, Policies ICC0965JTO & ICC0965JWO. B61000: In AR, ID, OK, & VA Policies: ICC18B61JWO & ICC18B61JTO. In DE, Policies B61JWO, B61JTO. B6000: In AR, ID, OK, PA, TX, & VA, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q6000 Whole: In AR, DE & OR, Policy Q60100M. In ID Policy Q60100MID. In OK, Policy Q60100MOK. Q6000 Term: In DE, Policies Q60200M. In AR, ID, OK, Policies ICC18Q60200M, ICC18Q60300C, ICC18Q60400C.
Coverage is underwritten by Tier One Insurance Company.
Final Expense: Arkansas, Delaware, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies ICC21-AFLLBL21 and ICC21-AFLRPL21; and Riders ICC21-AFLABR22, ICC21-AFLADB22, and ICC21-AFLCDR22.
This is a brief product overview only. Coverage may not be available in all states including but not limited to DE, ID, NJ, NH, NM, NY, or VA. Benefits/premium rates may vary based on plan selected. Optional riders are available at an additional cost. The policy has limitations and exclusions that may affect benefits payable. Refer to the policy for complete details, limitations, and exclusions. For costs and complete details of the coverage, please contact your local Aflac agent.
The content herein is provided for general informational purposes and is not provided as tax, legal, health or financial advice for any person or for any specific situation. Employers, employees and other individuals should contact their own advisers about their situations. Receipt of accelerated death benefits may affect eligibility for public assistance programs. Benefits may also be taxable, and are not expected to receive the same favorable tax treatment as other types of accelerated death benefits that may be available.
Aflac WWHQ | Tier One Insurance Company | 1932 Wynnton Road | Columbus, GA 31999
Aflac New York | 22 Corporate Woods Boulevard, Suite 2 | Albany, NY 12211