Insurance Curator High net worth (HNW) families in the United States frequently use life insurance to transfer wealth, provide liquidity for estate taxes, and preserve business continuity. Split-dollar life insurance—where premium payments, policy ownership, death benefit, and economic benefit are apportioned between two parties—can be an efficient tool in specific, tightly scoped situations. This article explains when split-dollar makes sense for HNW families (with examples from New York, California, and Texas), shows numeric illustrations, and compares split-dollar to practical alternatives.
What is split-dollar (quick primer)
Split-dollar arrangements allocate the policy’s cash value, death benefit, and premium obligations between two parties (typically a family member/trust and an employer or another family member). Two principal IRS regimes historically have been used to tax these arrangements: the economic benefit regime and the loan regime. Proper structuring and documentation are essential to avoid adverse tax consequences or unintended transfer-for-value exposure.
For a deep technical review, see: Split-Dollar Insurance Demystified: Structures, Regimes, and Tax Consequences for Owners.
When split-dollar makes sense for HNW families (practical criteria)
Split-dollar is generally suitable for HNW families when all of the following are true:
- A clear, measurable need for liquidity at death (e.g., estate tax liability, buy-sell funding for a family business).
- A willing counterparty (commonly a family-owned business, employer of a key owner, or an intra-family lender/trust).
- Material premium or financing support is required that the insured or trust cannot or will not fully fund on its own.
- Estate and income tax optimization is plausible where the economics of split-dollar (compared to premium financing or ILIT-funded life insurance) create a net benefit after fees and interest.
- Robust documentation and counsel—arrangement reviewed by estate, tax, and insurance counsel to withstand IRS scrutiny (see Split-Dollar Anti-Abuse Considerations: Documentation and Substantiation to Withstand Scrutiny).
Typical scenarios where split-dollar often fits:
- A closely-held business in New York needs predictable funds to execute a shareholder buyout on owner death.
- A California-based HNW couple wants to preserve a generational estate for grandchildren while minimizing annual out-of-pocket premium costs now.
- A Texas business owner needs to reward and retain a key family executive while funding a life policy without immediate cash outlay.
Case examples with numbers (illustrative)
All numeric illustrations are simplified. Consult carriers and advisors for quotes and suitability.
Case A — Survivorship funding to pay federal estate tax (New York)
- Family: Married owners age 62 and 60.
- Need: $8 million estate tax liquidity anticipated in 6–10 years.
- Structure: Split-dollar between family trust (owner of death benefit and cash value growth) and family-owned S-corp (pays portion of premiums in exchange for reimbursement on policy basis at termination).
- Economics: For a $8M survivorship universal life (SUL), initial annualized blended premium might range from $60,000–$180,000 depending on underwriting and product design. Using split-dollar to shift part of the premium cost to the S-corp can reduce current out-of-pocket payments for the trust while the S-corp recovers its economic interest when benefits are paid or policy is terminated.
Case B — Retaining a key family executive (California)
- Family business wishes to reward a non-family CEO (age 55) who is critical to value creation.
- Structure: Employer-owned split-dollar under a loan regime: employer advances premiums (treated as a loan) and is repaid from the death benefit or policy cash values; executive receives the net death benefit.
- Result: Lower cash cost to executive, employer holds enforceable repayment terms and security. Plan parallels executive compensation packages offered by large CA-based private firms.
Case C — Intergenerational wealth shift with limited current liquidity (Texas)
- Older parents (age 68 and 65) want to transfer $5M of economic value to children but prefer to avoid gifting large taxable sums now.
- Structure: Intra-family split-dollar where parents pay a modest portion of premiums, children’s family trust funds the balance; repayment terms allocate premium recovery to the trust.
- Outcome: Shift of wealth while preserving flexibility; often cheaper than large outright gifts coupled with retained control.
Note: illustrative premium ranges reflect market examples (see industry pricing data below). Actual quotes from carriers such as Prudential, MassMutual, Northwestern Mutual, and Lincoln Financial are underwritten and vary widely by age, health class, product guarantees, and investment crediting rate.
Comparison: Split-Dollar vs Alternatives
| Feature / Goal | Split-Dollar | Irrevocable Life Insurance Trust (ILIT) + Paid Premiums | Premium Financing | Second-to-Die Survivorship Policy (Paid Outright) |
|---|---|---|---|---|
| Up-front trust cash required | Low–Moderate | High (gifts or loan needed) | Low (collateral required; loan interest) | High |
| Control over policy | Shared (depends on docs) | Trustee controls | Borrower/owner controls | Owner/insured controls |
| Estate tax outcome | Can exclude if structured | Typically excluded if trust is properly drafted | Depends on recourse and ownership | Excluded if owned by ILIT |
| Complexity & legal cost | High | Moderate–High | High | Moderate |
| Typical annual cost (illustrative) | Premiums + admin + loan interest | Premiums + trustee fees | Loan interest (L+1–4%) + premiums | Premiums only |
Sources for market pricing guidance: PolicyGenius and Insure.com provide sample retail pricing to illustrate ranges for term and permanent policies (see Resources).
For design with trusts and agreements, see: Designing Split-Dollar with Trusts and Buy-Sell Agreements for Business Owners.
Compliance, tax traps, and vendor selection
- Document everything. The IRS scrutinizes split-dollar. Use written split-dollar agreements, repayment schedules, valuation methods, and periodic substantiation (see Split-Dollar Anti-Abuse Considerations: Documentation and Substantiation to Withstand Scrutiny).
- Beware transfer-for-value. Improper transfers can create income tax liabilities on policy proceeds.
- Choose reputable carriers and lenders. Large mutual carriers (MassMutual, Northwestern Mutual), stock carriers (Prudential, Lincoln Financial), and private-placement specialists can underwrite high-limit survivorship or single-life UL. Pricing: a high-quality survivorship UL policy for ages 60–65 often requires annual injections in the tens of thousands to low hundreds of thousands; term equivalents are much lower. Premium financing lenders are frequently private banks and wealth lenders (e.g., JPMorgan Private Bank, Bank of America Private Bank) that price loans relative to benchmark rates (loan spreads vary by lender and credit).
- ERISA & employer-owned issues. When employers are a party, coordinate with benefits counsel: ERISA and welfare benefit rules can be implicated. See: Employer-Owned Policies and Split-Dollar: Compliance, ERISA Issues, and Best Practices.
Practical due diligence checklist (before implementing)
- Obtain life insurance quotes and actuarial modeling from at least two carriers (Prudential, MassMutual, Northwestern Mutual, Lincoln).
- Model after-tax outcomes (estate tax, income tax, gift tax) with and without split-dollar.
- Confirm lender economics if premium financing is part of structure; get indicative loan spread and collateral rules.
- Engage estate and tax counsel to draft agreement and confirm exit/unwinding mechanics (see: Unwinding Split-Dollar: Tax Traps, Transfer-for-Value, and Post-Termination Risks).
- Consider alternative designs (ILIT-funded survivorship policy or direct gifts) and compare net present value.
Resources and market references
- IRS: Topic No. 503 — Life Insurance Proceeds (general federal tax treatment): https://www.irs.gov/taxtopics/tc503
- PolicyGenius — How much does life insurance cost? (retail rate examples and ranges): https://www.policygenius.com/life-insurance/how-much-does-life-insurance-cost/
- Insure.com — Life insurance rates and sample quotes: https://www.insure.com/life-insurance/rates.html
For implementation guides and deeper technical topics, see these related pieces in the same cluster:
- Split-Dollar Insurance Demystified: Structures, Regimes, and Tax Consequences for Owners
- Economic Benefit vs Loan Regime: How the IRS Treats Split-Dollar Arrangements Today
- Using Split-Dollar to Reward Key Executives and Preserve Family Wealth in Closely Held Firms
Bottom line
Split-dollar is a powerful, but complex, tool for HNW families in major U.S. markets (New York, California, Texas) when the objective is to conserve cash, provide business liquidity, or shift wealth with reduced current gifting. It is rarely a plug-and-play solution—success requires precise underwriting, careful tax modeling, trusted carriers (e.g., MassMutual, Northwestern Mutual, Prudential, Lincoln Financial), reliable lending partners, and robust legal documentation. If your situation involves estate tax liquidity, business succession, or executive retention and you meet the criteria above, split-dollar deserves a seat at the table in your planning discussion.