Split-Dollar Life Insurance: An Executive Benefit Funding Strategy

In today's competitive talent environment, organizations are increasingly looking beyond traditional compensation packages to attract and retain key executives. Executive benefit programs can play an important role in a comprehensive rewards strategy, particularly when designed to address long-term financial security and retirement planning needs.

One such strategy is split-dollar life insurance, a flexible funding arrangement that allows employers and executives to share the costs and benefits of a life insurance policy. Although the concept has existed for decades, split-dollar arrangements continue to be used as a sophisticated tool for executive compensation, retention, estate planning, and business succession strategies.

What is split-dollar life insurance?

Split-dollar life insurance can help fund valuable executive benefits while providing life insurance protection and potential cash value accumulation. Split-dollar life insurance is not a separate type of insurance policy. Rather, it is an arrangement between an employer and an employee that outlines how the costs, benefits, and ownership rights associated with a life insurance policy will be shared.

Under a split-dollar agreement, the employer typically contributes to some or all of the policy premiums. In return, the employer may recover its premium contributions or maintain rights to a portion of the policy's death benefit or cash value. The executive may receive valuable life insurance protection and may gain access to future policy benefits, depending on the arrangement design.

Because these agreements are highly customizable, they can be structured to address a wide range of organizational and individual objectives.

How split-dollar arrangements support recruitment and retention

For many companies, particularly closely held businesses and organizations competing for specialized leadership talent, executive benefits can provide a strategic advantage.

Split-dollar life insurance may help organizations:

• Recruit highly qualified executives in competitive markets
• Retain key leaders through long-term benefit structures
• Supplement traditional retirement benefits
• Support ownership transition and succession planning goals
• Provide additional financial security for executives and their families

Unlike broad-based employee benefits programs, split-dollar arrangements are typically designed for a select group of executives whose leadership has a significant impact on business performance.

Common split-dollar structures

Modern split-dollar arrangements generally fall into two primary categories:

Economic benefit regime

In an economic benefit arrangement, the employer typically owns the life insurance policy and retains most ownership rights. The executive receives a valuable life insurance benefit, and the annual value of that protection is treated as taxable income.

This approach is often attractive when the employer seeks to maintain greater control over the policy while providing meaningful benefits to the executive.

Loan regime

Under a loan regime arrangement, the executive typically owns the life insurance policy while the employer advances premium payments in the form of loans. These loans may accrue interest or have interest imputed as taxable income and are subject to specific documentation and reporting requirements.

This structure can create opportunities for the executive to build policy cash value while providing flexibility in long-term planning.

The appropriate structure depends on the organization's objectives, executive demographics, financial considerations, and legal and tax requirements.

The role of cash value life insurance

Many split-dollar arrangements utilize permanent life insurance, such as whole life or universal life policies, because of their ability to accumulate cash value over time.

When properly structured, policy cash value may provide additional flexibility for future planning needs, including:

• Supplemental retirement income strategies
• Estate planning objectives
• Wealth transfer planning
• Business continuity planning
• Legacy protection for family members

Because policy performance depends on policy design, premiums, market conditions, and insurer guarantees, organizations should carefully evaluate potential outcomes before implementing a strategy. Split-dollar arrangements can be complex and costly, and actual policy performance may differ from illustrations. Loans, withdrawals, lapse, or surrender may reduce benefits, require additional premiums, or result in tax consequences.

Recruitment and retention advantages

Executive turnover can be costly and disruptive. Replacing senior leadership may involve recruitment expenses, onboarding costs, productivity losses, and impacts on organizational culture.

Split-dollar life insurance arrangements can support retention efforts by creating a long-term financial incentive tied to continued employment. Many agreements include vesting schedules, service requirements, or other provisions that encourage executives to remain with the organization over time.

When incorporated into a broader executive benefits strategy, these arrangements can help demonstrate an organization's commitment to investing in key leadership talent.

Important tax and compliance considerations

Split-dollar arrangements are governed by complex tax and regulatory rules. The taxation of premiums, policy benefits, ownership rights, and employer contributions can vary significantly depending on the design of the arrangement.

Organizations considering a split-dollar strategy should evaluate:

• Applicable IRS regulations and reporting requirements
• Executive and employer tax consequences
• Policy ownership structure
• Exit and termination provisions
• Recovery of employer contributions
• Estate and wealth transfer implications
• Documentation and administration requirements

Because these arrangements involve financial, legal, and tax considerations, coordination among insurance, tax, legal, and benefits advisors is critical.

Is split-dollar life insurance right for your organization?

Split-dollar life insurance is not a one-size-fits-all solution. However, for organizations seeking innovative ways to attract, retain, and reward key executives, it can be a valuable component of a broader executive benefits strategy.

Arrangements should be carefully aligned with business objectives, executive needs, and long-term organizational goals. With proper planning and administration, split-dollar life insurance can help create meaningful value for both employers and executives while supporting business continuity and financial security.

How Brown & Brown can help

Designing an executive benefits strategy requires balancing organizational objectives, talent priorities, financial considerations, and regulatory requirements. At Brown & Brown Executive Benefits, we help organizations evaluate, design, and implement executive benefit strategies that support retirement readiness, leadership retention, and succession planning objectives.

Split-dollar life insurance may be one component of an executive-benefits strategy, but it involves policy costs, long-term funding commitments, tax and legal considerations, and ongoing administrative requirements. The suitability and structure of an arrangement depend on the organization's objectives, the executive's circumstances, the type of insurance policy, and applicable law.

Whether your organization is exploring executive retention strategies, succession planning initiatives, or supplemental benefit programs, a thoughtful review of split-dollar life insurance may reveal opportunities to strengthen your overall compensation and benefits program.

To receive valuable insight and plan design alternatives that may improve outcomes for your organization, please contact a member of the Brown & Brown Executive Benefits team.

Securities offered through Integrity Alliance, LLC, Member SIPC, Integrity Wealth is a marketing name for Integrity Alliance, LLC. Advisory and insurance services offered through Brown & Brown. Brown & Brown is not affiliated with Integrity Wealth. Tax and legal services are not offered through Integrity Wealth. Split-dollar life insurance is an arrangement, not an insurance policy, under which parties share policy costs, ownership rights, cash values, and death benefits. Tax treatment depends on the arrangement and policy ownership. Split-dollar arrangements may involve significant costs, long-term funding, administrative requirements, nonguaranteed policy values, lapse risk, and potential tax consequences. Companies should consult legal counsel regarding restrictions on loans to directors or executive officers. Consult qualified legal and tax advisors before establishing or modifying an arrangement.