Split Dollar Life Insurance

By: Rick Bouffard
Imagine this scenario. Your parents are both very hardworking and creative people. Instead of going the route of a steady 9-5 job, they decided on something much more challenging. They decided to create their own business. Through lots of hard work and education the family business became a huge success; so much of a success that they were able to raise you and send you on to college where you decided to study business. After your hard work and dedication you leave your university with a Masters in Business administration. You and your family both agree that having you work within the family business will be a win-win situation. They will have the benefit of your University level business skills and you will gain some valuable life experience as well as a salary. A few years pass by and your parents decide it’s time for you to take over the reigns of the family business. What an opportunity. Although you have discovered that you have a few problems. You cannot afford to pay the insurance premiums of the businesses, for the existing life insurance policies. What can you do?

This is a scenario that occurs frequently in family businesses. The parents or business owners have built their assets up over time. The worker, or in this case family member cannot possibly take over the life insurance polices of a successful business that has been in operation for several years. The gap in ages and salaries presents a problem, however there exists split dollar life insurance that can help. Split dollar life insurance basically means that the cost of the premiums can be split between other parties. The benefit would also be split but it can present a way forward if the person wanting to take ownership of the business was short on assets.

There are other benefits to spit dollar life insurance. Key employees can quite often take part in their company’s life insurance policy. Through the split dollar method the employee can gain a greater quantity of life insurance than they could ordinarily afford. The split dollar method can also help those of advancing age with health problems obtain life insurance where on their own they may face difficulty.

Companies can also participate in split dollar life insurance by offering their employees life insurance protection. For example, an employer and employee agree to buy a $100,000 life insurance policy on the employee’s life. When the employee dies, we’ll say the company has paid $25,000 in premiums. The company, if fully reimbursed for this amount and the employee’s beneficiaries receive the remaining $75,000.

Before purchasing a split dollar life insurance policy with your company, you do need to be aware of tax considerations. First, the premiums are generally not tax deductible by either party. The employee needs to consider that if the company grants a bonus to the salary to pay the premiums then this is subject to tax. This can then be used as a tax deduction for the employer.

Split dollar life insurance can be a great asset. It can make for easy buy-sell arrangements for businesses as well as make it possible to purchase insurance for other specific financial goals. Split dollar life insurance enables older individuals or those who may find it difficult to purchase life insurance do so via the help of their companies. The companies and individual employees can also enter into agreements to purchase split dollar life insurance with benefits to both sides. With good advice and clear goals a split dollar life insurance policy can offer you protection and financial security for the future.


Rick Bouffard is an insurance industry advisor and technologist who helped create one of the life insurance industry's first ELearning Centers at EFinancial.com. The EFinancial Learning Center contains hundreds of helpful articles and calculators to educate today's insurance shopper and help them make the best decisions for the financial health and future of their family.

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