Insurance Curator 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
- Insist on written buyout formulas up front; avoid oral side agreements.
- Use independent actuarial review for high-dollar policies (>$5M).
- Stagger policy ownership for family-controlled businesses to protect estate tax objectives.
- Consider ERISA and employer-owned policy rules (see Employer-Owned Policies and Split-Dollar: Compliance, ERISA Issues, and Best Practices).
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
- Investopedia — Split-Dollar Life Insurance: https://www.investopedia.com/terms/s/split-dollar-life-insurance.asp
- Policygenius — How much does life insurance cost?: https://www.policygenius.com/life-insurance/how-much-does-life-insurance-cost/
Related internal resources
- Split-Dollar Insurance Demystified: Structures, Regimes, and Tax Consequences for Owners
- Designing Split-Dollar with Trusts and Buy-Sell Agreements for Business Owners
- Economic Benefit vs Loan Regime: How the IRS Treats Split-Dollar Arrangements Today
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.