Understanding Split-Dollar Life Insurance: What You Need to Know

In a rapidly changing financial landscape, split-dollar life insurance plans have become a tool for business owners, high-net-worth individuals, and sometimes employees. 

First, every split-dollar plan involves an agreement between two parties–typically an employer and an employee or business owner and themselves–sharing the cost, benefits, and ownership of the policy. 

The company pays the premiums, but the insured is the policy beneficiary and can borrow against its cash value while still alive. Other benefits of split-dollar plans are the ability to maintain flexibility, and are customizable to suit the individual needs of different parties. If you are looking for ways to lower your tax bill while also creating financial protection for yourself and your family, a Split-Dollar plan should be something that would be valuable to your financial toolkit.

What Is A Split-Dollar Life Insurance Plan?

Split-dollar life insurance is a contract where two parties agree to split the expenses and advantages of a permanent life insurance policy. Real estate investors can utilize split-dollar plans to offset their tax liability while maintaining access to their money, which provides notable benefits in lowering costs while at the same time increasing your financial stability, creating extra income that you can utilize during retirement tax-free and pass on to your children.  

Working with a qualified CPA, Attorney, and Life Insurance agent, the money that would have been considered as regular income is “split” between personal and corporate income. This is the starting point for tax savings. We then use a Cash Value life insurance policy tailored for cash savings and growth, not death benefit, to hold the money as income for the corporation. The owner and beneficiary of the said policy can use the Cash value as they see fit. This setup is somewhat simple. However, it is highly regulated and commonly audited which is why the policy formation must be prepared and administered by qualified professionals.

Example Of A Split-Dollar Life Insurance Plan

Imagine John, a successful entrepreneur who has a pretax income of $200,000 that he pays to himself from his company. John is tired of losing so much of his income to taxes and sees value in leaving a legacy of financial security to his family. So John decides to work with a group of professionals to create what tax savings he can.

With the plan in place, John will continue to take $86,000 as regular income lowering his personal income from 32% to 22%. The remainder of his $200,000 income will be dispensed into a C-Corp specifically set up for this purpose. His C-Corp will realize the $114,000 as income and pay corporate income taxes on that money. Instead of paying 24% and 32% in income tax had John taken that money as personal income, the C-Corp pays 21% and lowers John's tax debt. At this point, John can’t touch the money, and if he does, he has to pay personal income tax on it.  

Once the taxes have been paid, the C-Corp will purchase a Cash Value Life Insurance Policy on John, and one of the benefits of this Cash Value policy is that John can access the money inside of the policy “tax-free.” This Life insurance policy is not your regular, “I want life insurance” policy. It is a highly customizable, adjustable, and unique policy that is built specifically for the purpose of these plans.

So the net benefit is that John pays less in taxes, maintains access to the money, and builds a financial nest egg in the form of a life insurance policy that not only offers a way to pass on what John has worked so hard to build, but also acts as leverage for John to grow and expand financially, at a rate that he wouldn’t have otherwise.   

Advantages Of A Split-Dollar Life Insurance Policy

Split-Dollar Life Insurance plans contain a lot of advantages for those who are capable of utilizing the structure. The parties involved in a split-dollar arrangement come to an agreement to share in the costs of the plan and thus share in the benefits. If you are the sole proprietor of your business, then you are splitting the benefits with yourself. If your business operates as a partnership, each partner can set up their own split-dollar plan.  

Split-dollar life insurance policies benefit those who want to:

  • create extra tax arbitrage
  • create leverage for growing net worth
  • looking to protect their assets
  • transfer wealth to their loved ones
  • want to provide financial security for their family after they pass away
  • transfer assets into a life insurance policy before death
  • reduce taxes on large estates 

Disadvantages Of Split-Dollar Life Insurance

There are some drawbacks to split-dollar life insurance, including the following:

  • Cash value life insurance policies are long term investments, you will lose access to some of your cash value in the 1st few years of your policy so if the money used to fund these strategies is needed for living then this is not a good plan for you. 
  • Extra paperwork: due to the regulatory factors surrounding these strategies the likelihood of audits is high.  
  • NOT DIY: These strategies are not something that you can do on your own.
    • Most CPAs, Lawyers, and Financial advisors overlook the savings that can be had through strategies like this simply because they don’t know about them, nor do they understand them, and so they don’t want to include them in your portfolio. 

When evaluating whether split-dollar life insurance is right for you, consider and understand the following:

  • Financial goals: determine whether this approach will help you cost-effectively achieve them 
  • Potential tax implications associated with owning a permanent life insurance policy
  • Your overall financial picture
  • Rights and responsibilities before signing any related agreements or contracts
  • Are you doing all the other things to not just save on taxes but also generate income now and in the future for yourself and your family, i.e. tax-deferred investing through 401K and 403B, Both Roth and Traditional IRA savings, properly filing your taxes with a knowledgeable CPA.
    • Just utilizing a good CPA or Tax attorney can save you thousands of dollars/year.  

Key Takeaways

A split-dollar plan is an arrangement between two parties to share the costs and benefits of a permanent life insurance policy. The benefits of a split-dollar life insurance policy include:

  • Tax savings
  • Asset protection
  • Maintaining access to your money while inside of a financial vehicle 
  • Transferring wealth to loved ones
  • Providing financial security for the family
  • Reducing taxes on large estates

In conclusion, a split-dollar insurance plan can be an excellent fit for a real estate investor. Schedule a meeting to review all the key points, including the benefits and drawbacks of the plan.

This article has been written for educational purposes only and is not financial advice nor a recommendation for anyone to utilize the strategies discussed herein. Work with certified Tax and Financial advisors to determine the right solutions for you and your financial situation.   

Last Updated: 
May 24, 2023

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

Learn How To Achieve Total Asset Protection While Growing Your Professional Network

Ready to know more than your attorney? Join our community platform where you'll get immediate FREE access to all our best educational resources for real estate investors. Including 8 Masterclasses, group mentoring replays, and much, much more.



Join thousands of real estate investors in all 50 states as they enjoy exclusive content, special promotions, and behind-the-scenes access to me and my guests. No spam, ever. Just great stuff!




Do you have asset protection questions? We can help!


© 2023 - Royal Legal Solutions