A split-dollar plan is an arrangement between two parties that involves "splitting" the premium payments, the cash values, the ownership of the policy, and the death benefits. The arrangement generally involves permanent cash value insurance such as whole life, universal life, variable universal life or a term/whole life blend. An insurance policy with substantial cash value acquired through a split-dollar arrangement can be used by an employee as a source of supplemental retirement income.

By splitting the premiums and ownership with the employee, the employer is essentially guaranteed of receiving the cost of the employer’s contributions to the plan. At the time of death of the insured-employee, the employer will receive an amount equal to the total premiums paid and the beneficiaries designated by the employee will receive the remaining death benefit.

Many businesses find a split-dollar arrangement an effective and economical way to obtain and retain key employees by helping them to achieve some sense of security at relatively no cost to the employer and at little cost to the employee. Split-dollar plans can also be very effective where large amounts of insurance are needed by a partner or a business-owner’s estate.