Split-Dollar + COLI/EOLI
How Split-Dollar Life Insurance Works: Who Owns, Who Pays, Who Recovers
Published October 9, 2026 · Updated October 9, 2026
Short Answer: What a Split-Dollar Arrangement Does
Split-dollar life insurance is an agreement between the owner of a life insurance policy and someone who does not own it. One or both pay the premiums. At least one of the paying parties is entitled to get back some or all of what it paid, either from the policy's proceeds or through repayment secured by them.
That definition comes from 26 C.F.R. § 1.61-22(b)(1), the Treasury regulation that defines a split-dollar life insurance arrangement. Business owners, shareholders and executives usually ask how split dollar works because the arrangement sits between a business and a key person. Who owns the policy generally decides which of two federal tax regimes applies: the economic benefit regime or the loan regime. Business Life Insurance explains the mechanics, the parties, the tax treatment, and when the structure may or may not fit.
The Planning Objective: Why Businesses Use Split-Dollar Arrangements
The business problem comes before the policy. A company may want a key executive or owner-employee to have meaningful life insurance coverage, but that person may not be able or willing to pay the full premium alone. A split-dollar arrangement is a way to fund that coverage while the business keeps a right to recover its outlay.
Common objectives include:
- executive benefits and retention;
- funding a business succession plan;
- protecting the business against the loss of a key person.
For a closely held business interest, the arrangement may also fund estate liquidity for the owner's family.
The defining feature is the cost-sharing and recovery structure, not simply who pays. The industry uses the terms "equity split-dollar" and "non-equity split-dollar" to describe whether the non-owner shares in cash value. These are industry labels, not terms defined in the regulations. The split-dollar life insurance overview covers the basic concept.
How the Structure Works: Premiums, Ownership and Recovery
The regulation sets three criteria in 26 C.F.R. § 1.61-22(b)(1):
- "Either party to the arrangement pays, directly or indirectly, all or any portion of the premiums," including payment by means of a loan secured by the contract.
- At least one paying party "is entitled to recover (either conditionally or unconditionally) all or any portion of those premiums and such recovery is to be made from, or is secured by, the proceeds."
- Under 26 C.F.R. § 1.61-22(b)(1)(iii), the arrangement is not part of a group-term life insurance plan described in section 79, unless that plan provides permanent benefits to employees.
T.D. 9092 states that the definition of a split-dollar life insurance arrangement "does not cover the purchase of an insurance contract in which the only parties to the arrangement are the policy owner and the life insurance company acting only in its capacity as issuer of the contract."
T.D. 9092 notes that these arrangements are "structured in myriad ways," including the following two forms, whose method names are industry usage:
- Endorsement method. The business owns the policy and endorses part of the death benefit to the employee's beneficiary.
- Collateral-assignment method. The employee owns the policy and assigns a security interest in it to the business.
Who pays how much of the premium, and what the paying party recovers, is set by the arrangement within the criteria above.
The written split-dollar agreement sets the actual recovery amounts and the events that trigger recovery. Which regime governs the agreement turns on ownership and structure, as described under Tax Treatment.
Parties Involved: Owner, Non-Owner and the Policy
Each split-dollar arrangement has these roles:
- The owner. This is generally the person named as the policy owner. In an endorsement arrangement the employer is the owner in form; under collateral assignment, the owner is the employee.
- The non-owner. This is typically the executive or key person.
- The insured. This is the person whose life the policy covers, often the non-owner. The regulatory definition turns on ownership, not on who is insured.
- The beneficiary. The non-owner's named beneficiary receives the share of the death benefit that the owner does not recover.
- The split-dollar agreement. This is the written contract that governs premium sharing, ownership rights and recovery. Its terms are drafted to match the applicable federal regime.
The regulation also reaches arrangements that do not meet the general test. Under 26 C.F.R. § 1.61-22(b)(2), an arrangement between an owner and a non-owner is treated as split-dollar, whether or not the criteria of paragraph (b)(1) are met, if it is described in either of the following:
- a compensatory arrangement that is entered into in connection with the performance of services, is not part of a group-term life insurance plan described in section 79, and under which the employer or service recipient pays, directly or indirectly, all or any portion of the premiums;
- a shareholder arrangement that is entered into between a corporation and another person in that person's capacity as a shareholder, and under which the corporation pays, directly or indirectly, all or any portion of the premiums.
In either case, the arrangement must also meet one of two further conditions: the beneficiary of all or any portion of the death benefit is designated by the employee, service provider or shareholder (or is a person that individual would reasonably be expected to designate), or that individual has "any interest in the policy cash value" of the contract.
When the employer owns the policy, it may be an employer-owned contract under 26 U.S.C. § 101(j). For those contracts, the death-benefit exclusion is capped at premiums and other amounts paid unless two conditions are both met:
- a section 101(j)(2) exception applies, based on the insured's status or on amounts paid to the insured's heirs;
- written notice and consent were given before the contract was issued.
The business life insurance ownership page explains how ownership choices interact with these rules.
Who This Is For: Common Users of Split-Dollar Arrangements
Split-dollar arrangements may arise in settings such as these:
- Closely held C and S corporations. These often consider split-dollar arrangements for shareholder-employees or key executives. The shareholder-arrangement rule in 26 C.F.R. § 1.61-22(b)(2)(iii) reaches arrangements entered into with a person "in that person's capacity as a shareholder." The shareholder life insurance page describes related buy-sell uses.
- Businesses retaining a key executive. Some businesses tie a long-term benefit to continued employment.
- Business owners funding a buy-sell obligation. This applies where the ownership and recovery pattern fits the arrangement.
Whether the arrangement suits any business depends on the business, the executive's situation and the policy.
When a Split-Dollar Arrangement May Fit
Several facts typically lead a business to consider split-dollar:
- Substantial coverage with shared cost. The business wants a key executive to have substantial coverage and wants to share the premium cost rather than pay it as compensation outright.
- An expected recovery. The employer expects to recover its outlay from the policy's cash value or death benefit. That makes the economics different from a straight bonus.
- A written agreement. The parties want a written, structured cost-sharing agreement rather than an informal understanding.
- A long time horizon. These arrangements are usually designed to run for many years. Their tax and recovery mechanics play out over the life of the policy.
These describe situations in which the structure is commonly evaluated. They do not indicate that it suits any particular business.
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When a Split-Dollar Arrangement May Not Fit
The structure is often set aside in the following situations:
- A simple death benefit is the goal. The business needs a simple death benefit with no cost-recovery feature.
- The executive wants full ownership and portability from the start. A collateral-assignment design leaves ownership with the employee. However, the employer's repayable advances may then be split-dollar loans subject to imputed-interest rules under 26 C.F.R. § 1.7872-15.
- The administration outweighs the need. Annual income measurement and regime compliance may outweigh a smaller or shorter-term need.
- The commitment is too long. The business cannot commit to a long-term premium-sharing structure.
Each of these is a set of facts that shapes the evaluation, not a conclusion about any reader's business.
Tax Treatment: Economic Benefit Regime and Loan Regime
Federal rules sort split-dollar arrangements into two regimes. Notice 2002-8 describes these as "two mutually exclusive regimes." The regulations apply to arrangements entered into after September 17, 2003, and treat an earlier arrangement that is materially modified after that date as a new arrangement entered into on the date of the modification (26 C.F.R. § 1.61-22(j) and § 1.7872-15(n)).
Economic benefit regime. Under one regime, "the economic benefits of a split-dollar life insurance arrangement generally are treated as transfers to the benefited party." Under 26 C.F.R. § 1.61-22(b)(3)(ii)(A), this regime applies to a compensatory arrangement where "the employer or service recipient is the owner of the life insurance contract." The non-owner takes into account "the full value of all economic benefits," reduced by the consideration the non-owner pays the owner for them (§ 1.61-22(d)(1)). The value is the cost of current life insurance protection, plus the policy cash value to which the non-owner has current access (to the extent not taken into account before), plus any other economic benefit provided (§ 1.61-22(d)(2)). Depending on the relationship between the parties, the economic benefits "may constitute a payment of compensation" (§ 1.61-22(d)(1)).
Loan regime. 26 C.F.R. § 1.7872-15(a)(2)(i) treats a payment as a loan, with the owner as borrower and the non-owner as lender, if all of the following are true:
- the non-owner makes the payment to the owner, including a premium paid to the insurer for the owner's policy;
- the payment is a loan under general tax principles, or "a reasonable person nevertheless would expect the payment to be repaid in full";
- repayment comes from, or is secured by, the death benefit, the cash surrender value, or both.
If a split-dollar loan is a below-market loan, section 7872 governs it. 26 U.S.C. § 7872(c)(1)(B) covers compensation-related loans between an employer and an employee. For a below-market demand loan, section 7872(a)(1) treats the forgone interest as "transferred from the lender to the borrower, and ... retransferred by the borrower to the lender as interest." Notice 2002-8 describes the result as a deemed interest payment by the employee, "funded by deemed additional compensation." The regulation applies section 7872 without its de minimis exceptions.
Premiums. 26 U.S.C. § 264(a)(1) provides that no deduction is allowed for "premiums on any life insurance policy ... if the taxpayer is directly or indirectly a beneficiary under the policy or contract." An employer that owns the policy and holds a recovery interest is generally in that position.
Death benefit. 26 U.S.C. § 101(a)(1) excludes from gross income amounts received "by reason of the death of the insured." That exclusion is limited in several ways. Two that matter here are:
- the transfer-for-value rule in section 101(a)(2);
- for employer-owned contracts, section 101(j).
The business life insurance tax treatment page covers both limits.
Split-dollar regime, ownership and taxation need individual review of the contracts involved by the insurers and a qualified tax professional.
Potential Advantages of a Split-Dollar Structure
The arrangement has several structural features. None of them is a predicted result:
- Cost-sharing. The employer funds most or all of the premium and holds a right to recover it. This changes the employer's economics compared with paying the same amount as a bonus.
- Executive benefit. The non-owner's beneficiary receives a death benefit funded largely by the employer.
- Retention design. The agreement can be written so that the employer's recovery right ends or shifts on defined events, such as years of service. This ties the benefit to continued employment.
- Ownership flexibility. The endorsement and collateral-assignment methods let the parties match the arrangement to who should hold ownership rights. Each method carries its own regime consequences.
Whether any of these features produces value for a given business depends on the policy, the agreement and each party's tax position.
Important Considerations: Complexity, Reporting and Ongoing Administration
Administration runs for the life of the arrangement:
- The written agreement. The agreement records ownership, premium shares and recovery. Terms that do not match the regime the facts produce can lead to unintended results.
- Annual measurement. Under the economic benefit regime, the employee's benefit is measured and reported each year. Under the loan regime, imputed interest on below-market loans is calculated each year.
- Partial repayment. A payment that is only partly repayable is split in two under 26 C.F.R. § 1.7872-15(a)(2)(ii): "One that is repayable and one that is not."
- Employer-owned contracts. Section 101(j) notice and consent are completed before issue, and employer-owned contracts carry related reporting requirements. The details of compliance depend on the contract.
- Policy performance. Cash value is a contract feature that varies with policy type and performance. T.D. 9092 notes that early-year surrender and load charges "may significantly reduce the policy's cash surrender value, resulting in under-collateralization" of the non-owner's repayment right.
- Termination. The agreement specifies what happens at the end. The tax consequences depend on the regime and the facts.
Insurance rules that bear on these arrangements vary by state. Insurer forms and procedures also vary from insurer to insurer and are confirmed with the insurers involved.
Tax and Legal Coordination: What Professionals Review
Several areas typically need coordinated review:
- Regime determination. Reviewers examine ownership and agreement terms against 26 C.F.R. § 1.61-22(b)(3) and 26 C.F.R. § 1.7872-15 to identify the governing regime and the reporting it brings.
- Agreement drafting. The agreement is a legal document. It governs recovery rights, termination and each party's obligations.
- Premium deductibility. Whether the business is "directly or indirectly a beneficiary" under 26 U.S.C. § 264(a)(1) affects whether a premium deduction is available.
- Section 101(j). Where the employer owns the policy, notice and consent are confirmed before the contract is issued.
- Compensation planning. Both regimes can produce compensation income to the employee. That may affect wage reporting and payroll. For compensation generally, 26 U.S.C. § 162(a)(1) allows "a reasonable allowance for salaries or other compensation for personal services actually rendered."
Structure, ownership and tax treatment are confirmed with qualified tax, legal and insurance professionals.
Alternatives to Split-Dollar: Other Executive Benefit Structures
Businesses also consider several other structures:
- Executive bonus plan. Also called a "section 162 plan," this is an industry term, not a qualified plan and not a term defined in the Code or regulations. The employer pays a bonus that the employee uses for premiums on a policy the employee owns. The bonus is compensation under section 162(a)(1), subject to reasonableness, and is taxable to the employee. The site's executive bonus plan pages cover it in depth.
- Restricted executive bonus arrangement (REBA). This is also an industry term. It adds a restriction agreement that limits the employee's access to the policy.
- Corporate-owned life insurance. The employer owns the policy and is its beneficiary. Section 101(j) can then apply if the employer is engaged in a trade or business and the contract covers the life of an insured who is an employee with respect to that trade or business on the date the contract is issued.
- Key-person insurance. The business owns a policy on a key employee's life and is the beneficiary, to offset the financial loss if that person dies. The site's key person insurance pages explain it.
Example (Hypothetical): Economic Benefit Regime in a Closely Held Corporation
This example is hypothetical. It rests on the following assumptions:
- a C corporation and a key executive aged 45;
- a permanent policy with a $1,000,000 death benefit;
- the corporation owns the policy (endorsement method) and pays the full premium;
- the economic benefit regime applies under 26 C.F.R. § 1.61-22;
- the corporation's recovery interest equals the premiums it has paid.
Step 1. The corporation pays a $10,000 premium in the first year. Because the corporation is a direct beneficiary, 26 U.S.C. § 264(a)(1) allows no deduction.
Step 2. The amount of current life insurance protection is the death benefit minus the total amount payable to the corporation under the arrangement (26 C.F.R. § 1.61-22(d)(3)(i)). The example assumes no policy cash value has been taken into account and that the executive pays nothing toward the benefit:
$1,000,000 − $10,000 = $990,000
The regulation multiplies that amount by the life insurance premium factor designated or permitted in published guidance (§ 1.61-22(d)(3)(ii)). Assume a hypothetical factor of $2 per $1,000 of protection:
990 × $2 = $1,980
This factor is illustrative only. Actual valuation follows the regulations and the published factors.
Step 3. Because the executive is assumed to be an employee of the corporation, the $1,980 is treated as a payment of compensation for the year (§ 1.61-22(d)(1)).
Step 4. Assume the executive dies after five years of $10,000 premiums. The corporation recovers its interest from the death benefit:
5 × $10,000 = $50,000
The beneficiary receives the remainder:
$1,000,000 − $50,000 = $950,000
Real amounts depend on the policy, the agreement and the applicable valuation. These figures represent no reader's result.
We're Here for You
We're your trusted California business life insurance advisor. Call us 7 days a week, or send us a message, to have a real conversation about what your business needs.
Frequently Asked Questions
What is a potential downside of split-dollar life insurance arrangements?
The main drawbacks are complexity and the annual tax effects. Each year the employee's economic benefit or imputed interest is measured. Premiums are generally not deductible when the business is directly or indirectly a beneficiary under 26 U.S.C. § 264(a)(1). Ending the arrangement early can also have tax consequences that depend on the facts.
What are the benefits of having split-dollar life insurance?
The structure lets an employer fund most of a premium while holding a right to recover it, and it gives the executive's beneficiary a death benefit. It can also be designed to support retention. These are structural features. Actual outcomes depend on the policy, the agreement and each party's tax situation.
What is the difference between the economic benefit regime and the loan regime?
Ownership and structure decide between them. Where the employer owns the policy in a compensatory arrangement, 26 C.F.R. § 1.61-22 treats the economic benefits as transfers to the employee. Where the employee owns the policy and the employer's payments are expected to be repaid from, or secured by, the policy's death benefit or cash surrender value, 26 C.F.R. § 1.7872-15 treats those payments as loans, and section 7872 applies if they are below-market.
What is a collateral assignment split-dollar plan?
It is an arrangement in which the employee owns the policy and assigns a security interest to the employer to secure repayment of the employer's advances. When repayment is expected and is secured by the policy, 26 C.F.R. § 1.7872-15(a)(2)(i) treats each payment as a loan. Example 1 of that regulation describes this pattern.
How does a split-dollar arrangement end, and what are the tax consequences?
The agreement sets the ending terms. The tax consequences depend on the regime, the policy's value at termination and the agreement's terms, so the outcome turns on facts specific to each arrangement.
Educational information only. Not legal, tax, investment or insurance advice. Product availability and outcomes depend on individual circumstances.