Insurance Curator High-net-worth estate planning increasingly uses life insurance to transfer wealth, provide liquidity for estate taxes, and preserve business continuity. Split-dollar life insurance — where the economic benefits and costs of a policy are split between two parties (typically an employer or a family business and an insured individual or trust) — remains a powerful but complex tool. This article, focused on U.S. planning (with particular relevance for advisors and owners in New York, California, and Illinois), explains the major structures, tax consequences for owners, pricing realities from leading carriers, and practical compliance considerations.
What is split-dollar insurance — quick primer
Split-dollar arrangements allocate:
- Payment of policy premiums (by Employer / Company / Insurer / Trust),
- Current economic benefits (cash surrender value, loans, policy income),
- Death benefits (recovery order usually defined by the agreement).
Two primary regimes govern tax treatment in the U.S.: the Loan Regime and the Economic Benefit (EB) Regime. Hybrid or collateral assignment structures exist and can blend features.
For foundational tax rules on life insurance proceeds and employer-owned policies, see the Internal Revenue Code (26 U.S.C. § 101): https://www.law.cornell.edu/uscode/text/26/101 and consumer guidance from the NAIC: https://www.naic.org/consumer_life_insurance.htm.
The three principal regimes — overview and owner tax consequences
1) Loan Regime
- Structure: Owner (individual or trust) is the insured/owner; the payer (usually employer or shareholder-co owner) advances premium amounts as bona fide loans secured by the policy’s cash value or as an assignment. The insured recognizes no immediate income for the lender’s premium payments.
- Taxation for owner: No current taxable income if loans are bona fide. Interest is charged (commonly at the Applicable Federal Rate — AFR). Loan forgiveness is potentially taxable. On termination, forgiveness or sections triggering transfer-for-value rules can produce adverse tax outcomes.
- Typical use: Executive compensation, shareholder buy-sell funding, intra-family lending.
2) Economic Benefit Regime (EB)
- Structure: Employer pays premiums and the insured receives an “economic benefit” from the employer’s payment (usually the right to policy death benefit or cash value). Historically IRS treated the imputed economic benefit as taxable compensation to the insured.
- Taxation for owner: The insured recognizes imputed taxable compensation based on actuarial value of the benefits provided. The owner may also have access to cash value that could be taxable if withdrawals exceed basis.
- Note: The EB regime produces the most visible taxable income to the insured and can trigger payroll and income tax withholding.
3) Hybrid / Collateral Assignment (split-collateral)
- Structure: Employer funds premiums but takes assignment of policy cash value as collateral; the insured retains death benefit rights beyond repayment. Treated as a mix of loan and EB; careful drafting can achieve desired tax outcomes.
- Taxation for owner: Depends on substance — if structured as a loan with interest at AFR and proper documentation, taxable consequences for insured may be limited. Poor documentation yields EB character.
Comparison Table: Loan vs Economic Benefit vs Hybrid
| Feature | Loan Regime | Economic Benefit Regime | Hybrid / Collateral |
|---|---|---|---|
| Who owns policy | Insured / Trust | Employer (often) | Usually Insured with collateral assignment |
| Current income to insured | Generally none if bona fide loan | Yes — imputed compensation | Depends on structure |
| Payroll tax exposure | Low if loan bona fide | High | Variable |
| Death benefit allocation | Owner (minus lender repayment) | Employer typically recovers advances | Owner net of repayment |
| Common use cases | Executive retention, family loans | Executive comps where employer wants control | Closely-held business liquidity with creditor protection |
Real-world costs: carriers, sample pricing, and capital needs
High-net-worth split-dollar implementations most often use large mutual and life carriers for guaranteed cash-value products (e.g., whole life, survivorship universal life). Popular carriers in HNW markets include:
- Northwestern Mutual — known for dividend-paying whole life and personalized funding strategies. Private client pricing for large SUL/IUL can begin in the tens of thousands annually; first-year funding for a multi-million-dollar death benefit often ranges from $50,000 to $200,000 depending on age and underwriting.
- New York Life — strong for survivorship (second-to-die) policies used in estate-liquidity planning. Market quotes for a $5M survivorship policy for a 55/53 couple often reflect planned premiums of $60,000–$180,000/year for fully funded designs.
- Prudential / Lincoln Financial — frequently used for corporate-owned and bank-owned life insurance (BOLI) and executive arrangements; pricing competitive for universal life designs with flexible funding.
Example illustrative scenario (New York City business owner, age 55):
- Goal: $3M survivorship policy to fund estate taxes.
- Typical first-year premium funding under a split-dollar loan arrangement: $40,000–$120,000 with interest charged at AFR on the loan portion. Premium varies by carrier, underwriting class, and product (whole life vs universal life vs survivorship indexed universal life).
Important pricing caveats:
- Exact quotes require underwriting (medical exams, nicotine status, income, and net worth disclosures).
- Premium illustrations should be provided by the chosen carrier or broker; carriers listed above provide bespoke illustrations via independent advisors and wealth managers in major markets (e.g., NYC, San Francisco, Los Angeles, Chicago, Miami).
Key tax concepts for owners (practical takeaways)
- Applicable Federal Rate (AFR): Many split-dollar loan regimes use AFRs to determine imputed interest. AFRs are published monthly by the IRS and affect imputed income calculations.
- Transfer-for-Value Rule: If a policy is transferred for valuable consideration, the death benefit may lose income-tax-free treatment to the extent of gain — a peril for poorly structured splits. Be mindful on termination or sale. For additional post-termination traps see Unwinding Split-Dollar: Tax Traps, Transfer-for-Value, and Post-Termination Risks.
- Documentation: The IRS focuses on substance over form — well-documented, commercially reasonable loan terms, repayment schedules, and security provisions materially reduce audit risk. See drafting best practices at Drafting Split-Dollar Agreements: Protecting Interests, Valuation, and Repayment Terms.
- Employer/ERISA concerns: Employer-owned policies and split-dollar arrangements raise ERISA and compliance issues when offered to rank-and-file employees — consult ERISA counsel for company plans.
When split-dollar makes sense for HNW owners
- Funding estate-tax liabilities for estates in high-tax states (NY, CA) where federal and state estate tax exposure is a concern.
- Retaining key executives in closely held firms where the company wishes to retain some economic interest in the policy.
- Providing liquidity for buy-sell agreements and succession planning in family businesses.
For deeper analysis on how the IRS currently treats loan vs economic benefit, see: Economic Benefit vs Loan Regime: How the IRS Treats Split-Dollar Arrangements Today.
Compliance checklist for owners and advisors
- Execute a written split-dollar agreement that clearly defines repayment, rights to cash value, and death benefit allocation.
- Use AFR-based interest or market-rate terms for intra-company loans to avoid imputed below-market loan income.
- Consider survivorship (second-to-die) designs for estate liquidity; obtain carrier illustrations for multiple scenarios.
- Review employer-owned policy rules (IRC 101(j)) and withholding requirements if compensation is imputed.
- Plan for termination events — design a buyout/repayment mechanics to prevent transfer-for-value exposure.
Conclusion — balancing design, tax, and commercial realities
Split-dollar insurance is a flexible tool for HNW estate planning, particularly in major U.S. markets like New York City, Los Angeles, and Chicago. The correct regime choice (loan vs economic benefit vs hybrid), rigorous documentation, and realistic funding expectations are essential. Work with experienced life carriers (e.g., Northwestern Mutual, New York Life, Prudential), actuarial illustrators, and tax counsel to align a split-dollar design with estate and corporate goals.
Further reading and practical resources:
- Economic Benefit v. Loan treatment discussion: Economic Benefit vs Loan Regime: How the IRS Treats Split-Dollar Arrangements Today
- Agreement drafting considerations: Drafting Split-Dollar Agreements: Protecting Interests, Valuation, and Repayment Terms
- Post-termination risks: Unwinding Split-Dollar: Tax Traps, Transfer-for-Value, and Post-Termination Risks
References
- Internal Revenue Code — Life Insurance Proceeds (IRC § 101): https://www.law.cornell.edu/uscode/text/26/101
- National Association of Insurance Commissioners — Consumer Guide to Life Insurance: https://www.naic.org/consumer_life_insurance.htm
Note: Illustrative premiums and carrier references are directional and will vary by underwriting class, product, and jurisdiction. Always obtain carrier illustrations and legal/tax advice tailored to the specific facts of the client.