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Drafting Split-Dollar Agreements: Protecting Interests, Valuation, and Repayment Terms

Split-dollar life insurance arrangements remain a powerful tool in High Net Worth (HNW) estate planning when used correctly. For business owners and executive compensation committees in major U.S. markets — New York City, San Francisco, and Chicago — split-dollar can preserve family wealth, provide executive retention incentives, and shift wealth efficiently across generations. This guide explains how to draft split-dollar agreements that protect parties’ interests, nail down valuation, and set enforceable repayment terms.

Contents

  • What is split-dollar and when HNW clients use it
  • Core protections to include in agreements
  • Valuation: methods, timing, and documentation
  • Repayment terms: loan vs economic-benefit regimes
  • Practical drafting checklist and sample commercial considerations
  • Illustrative costs and carrier context
  • Recommended next steps and sources

What is split-dollar and when HNW clients use it

Split-dollar is a funding and ownership technique in which two parties (commonly an employer and an executive, or a family trust and an owner) share the costs, rights, and benefits of a life insurance policy. In HNW contexts, common objectives include:

  • Funding buy-sell agreements and estate liquidity
  • Compensating key executives without immediate cash compensation
  • Preserving business continuity while minimizing estate tax leakage

Split-dollar can be structured principally as:

  • Loan regime — one party lends premium dollars and records a policy loan (formal repayment obligation).
  • Economic-benefit regime — the employee or insured recognizes taxable economic benefits for the cost of employer-provided insurance.

(For deeper background on structures and tax consequences see Split-Dollar Insurance Demystified: Structures, Regimes, and Tax Consequences for Owners.)

Core protections to include in every agreement

Drafting must anticipate termination, death, disability, transfer, and audit risk. Include the following protections:

  • Clear ownership and beneficiary provisions
    • Define who owns the policy, who controls premium payments, and listing of beneficiaries.
  • Allocation of premium payment and cash value
    • Itemize who pays what, how cash value increases are allocated, and how surrenders are treated.
  • Method for valuing the loan or employer’s interest
    • Establish valuation dates and the actuarial basis (see valuation section).
  • Repayment priority and waterfall on death/termination
    • Describe order: repayment of outstanding loan, split of remainder proceeds, and any surviving spouse/trust protections.
  • Events of default and cure mechanics
    • Missed premium obligations, insolvency triggers, and cure periods.
  • Assignment, transfer, and anti‑transfer-for-value clauses
    • Prevent inadvertent transfer-for-value tax traps and preserve step-up in basis planning.
  • Audit documentation and substantiation clause
    • Require disclosure of IRS examination costs, representation and cooperation obligations.

For documentation guidance that withstands scrutiny, see Split-Dollar Anti-Abuse Considerations: Documentation and Substantiation to Withstand Scrutiny.

Valuation — how to value the parties’ interests

Valuation drives tax consequences and economic outcomes. Common valuation approaches:

  • Actuarial cost method: present value of future death benefit benefits attributable to one party using mortality tables and discount rates.
  • Cash value attribution: employer’s interest measured by policy cash surrender value plus any outstanding loan.
  • Contractual fixed-dollar method: pre-agreed fixed repayment or credit schedule (favored for predictability).

Key drafting points:

  • Pick an accepted actuarial table and interest rate (e.g., 8020 or 2001/2012 tables; specify IRS-prescribed rates where applicable).
  • Define valuation dates: initial date, termination date, death date.
  • Include a valuation protocol: who provides an appraisal, who pays, and dispute resolution (independent actuary/arbitration).

Sample comparative summary:

Valuation Method Pros Cons
Actuarial present-value Economically precise; aligns with tax rules Requires actuarial support; can vary with assumptions
Cash-value attribution Simple and easy to administer May undervalue future death benefit; can create windfalls
Fixed contractual schedule Predictable for both parties May be imprecise relative to policy performance

For design with trusts and business agreements, consult Designing Split-Dollar with Trusts and Buy-Sell Agreements for Business Owners.

Repayment terms — drafting for enforceability and tax efficiency

Repayment terms must reflect the chosen regime and should be express in the contract.

Loan regime (recommended where repayment certainty is desired)

  • Treat employer-paid premiums as a taxable or non-taxable loan to the employee.
  • Document interest rate (arm’s‑length rate or company’s borrowing rate), amortization schedule, collateral (policy cash value), and acceleration clauses.
  • Require security interest in the policy and assignment of cash values as collateral.
  • Include net‑of‑loan death benefit allocation and clear offsets.

Economic-benefit regime

  • Employee recognizes imputed income for the economic benefit of employer‑paid coverage.
  • Agreement should tie imputed income calculation to premium cost or a standardized calculation (e.g., Table I/II cost).
  • Clarify who is responsible for tax withholding and FICA.

Hybrid and consensual repayment options

  • On termination, parties may elect buyout formulas (pre-agreed fixed payment, actuarial value, or cash value plus interest).
  • Consider escrow mechanics or a trustee-controlled “repayment account” to avoid liquidity shortfalls.

Table: Loan vs Economic-benefit (at-a-glance)

Feature Loan Regime Economic-benefit Regime
Tax on employer No immediate tax; loan recorded Employer’s premium leads to imputed income to employee
Employee tax Interest may be taxable if forgiven Imputed income taxed as wages
Valuation clarity High (loan balance and collateral) Requires imputed income calculations
Administrative burden Moderate — loan docs, security Moderate — payroll, withholding

For IRS stance and regime choice implications, review Economic Benefit vs Loan Regime: How the IRS Treats Split-Dollar Arrangements Today.

Practical drafting checklist

  • Identify parties and define roles clearly.
  • Specify policy details (carrier, contract number, ownership).
  • Insert premium payment schedule and funding source.
  • Provide valuation methodology, rates, and tables.
  • State repayment options at death, termination, or policy surrender.
  • Secure collateral with a perfected security interest; list the recording jurisdiction.
  • Include default remedies, insurance obligations (e.g., continuous coverage), and substitution rules.
  • Reserve the right to replace or convert policy if carrier goes insolvent or pricing changes materially.
  • Add clear dispute resolution (choice of law — typically NY or CA for HNW deals — and arbitration).

Illustrative costs, carriers, and market context (U.S. focus)

Top mutual and large-cap companies commonly used in HNW split-dollar structures in the U.S. include:

  • New York Life, MassMutual, Northwestern Mutual, Prudential, Pacific Life — these carriers offer permanent (whole life, universal life) products favored for cash‑value accumulation and predictable guarantees.
  • Large-term carriers such as Banner Life and Protective provide low-cost term if the plan intends temporary coverage.

Pricing context (illustrative only — actual quotes vary by age, underwriting class, product, and state):

  • For HNW permanent designs, initial first‑year premiums often range from $10,000 to $250,000+ depending on target death benefit and funding strategy.
  • For comparison of term pricing (useful if pairing term with permanent solutions), online aggregators show approximate benchmarks (e.g., a healthy 45‑year‑old non‑smoker buying $1M 20‑year term often pays in the $500–$1,200 annually range depending on carrier). See Policygenius pricing charts for market examples: https://www.policygenius.com/life-insurance/how-much-does-life-insurance-cost/

When selecting a carrier, HNW clients in New York, California, and Illinois should consider:

  • Carrier financial strength ratings (A.M. Best, S&P)
  • Product guarantees vs market-based credited rates for UL
  • Illustrated loan provisions and collateral assignment procedures

Negotiation tips for business owners and executives

Next steps

  • Engage a life insurance specialist broker, corporate counsel, and an actuarial consultant before executing agreements.
  • Obtain carrier illustrations and run multiple scenarios (best, expected, worst performance) before locking in repayment formulas.
  • Consider state-specific counsel in New York, California, or Illinois to address trust law, community property, and state tax issues.

Sources and further reading

Related internal resources

If you’re drafting a split-dollar agreement for a high-stakes executive or family deal in New York, San Francisco, or Chicago, retain specialized counsel and an independent actuary to document valuation and repayment terms precisely.

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