Split-Dollar Key Person Insurance: How the Arrangement Works

Split-dollar key person insurance is a life insurance policy on a key person that a business and another party fund and share under a written agreement. It helps a business plan for the loss of an owner or essential employee. This page explains how the split works, what the tax regimes mean, and what drives setup cost. NR CPAs & Business Advisors is a Miami CPA firm. Its life insurance work is offered by a licensed insurance agent, separately from the accounting practice.

What Split-Dollar Key Person Insurance Is and Who It Fits

Split-dollar is an arrangement, not a separate type of policy. Two parties agree how they will share the premiums, cash value, ownership and death benefit of one life insurance policy.

Key person insurance is coverage a business buys on an owner, partner or essential employee. The Insurance Information Institute explains that key person life insurance compensates a business for financial losses caused by a key employee’s death or disability. Split-dollar terms change who pays and who receives the money.

This structure usually fits:

• Owners of closely held businesses who want the company to keep running if they die.
• Business partners who need funds ready for obligations between owners.
• Employers who want to protect the business if a valued employee dies.

Nischay Rawal acts as a licensed insurance agent. Insurance is offered by the licensed agent, separately from the accounting practice.

How the Split Is Structured Between Two Parties

The written agreement decides who owns the policy, who pays each premium, and who receives the death benefit. Without clear terms, the two parties may read the same arrangement in different ways.

Key terms to settle:

• Ownership: The agreement names the policy owner and states who controls the cash value.
• Premiums: The agreement says how each party pays its share and whether any amount must be repaid.
• Death benefit: The agreement states how the benefit is divided between the business and the other party.

Consent comes first. Under Fla. Stat. § 627.404, a business entity has an insurable interest in the life, body and health of the owners, directors, officers, partners and managers of the business or of any affiliate or subsidiary, or of its key employees or key persons, if written consent is obtained from the key employees or persons before the insurance is purchased. For this rule, a key employee or key person is someone whose position or pay is described in s. 101(j)(2)(A)(ii) of the Internal Revenue Code. The business or its affiliate or subsidiary may not retaliate or take adverse action against any key employee or key person who does not consent.

Common failure points include:

• No written agreement at all.
• An unclear premium split between the parties.
• Repayment terms that no one wrote down.

Economic Benefit and Loan Regimes Explained

The economic benefit regime and the loan regime look at different parts of the arrangement. One focuses on the yearly value of coverage. The other focuses on premium payments and any repayment. The agreement and policy design decide which regime applies.

When comparing the two, check three things:

• Who pays: Which party funds each premium, and how that payment is recorded.
• Who reports: Which party carries the tax reporting for the year.
• How it ends: How the policy is transferred, repaid or surrendered when the arrangement stops.

Transfers need extra care. Premiums also carry a tax rule. Under 26 U.S.C. § 264, federal law denies a deduction for premiums on a life insurance policy if the taxpayer is directly or indirectly a beneficiary under the policy.

What the Arrangement Covers and Where the Values Sit

The policy pays a death benefit under its terms, and the agreement sets how that money is divided. The policy form controls what is covered and what is excluded.

• Buy-sell link: When owners fund a buy-sell agreement, Florida law lets each party insure the other’s life for that contract only.
• Guaranteed and non-guaranteed values: Knowing which figures a contract guarantees and which may change is a useful part of reviewing any whole life insurance policy. Dividends are not guaranteed.
• Term versus whole life: Term covers a set period. Whole life covers the insured’s life and builds cash value. Florida’s policy loan rules do not apply to term policies, under Fla. Stat. § 627.458.

Each policy has its own limitations and exclusions. The coverage review identifies the insurer and the policy form number before any decision.

What It Costs to Set Up: The Components That Drive the Price

Setup cost has several parts. No single figure applies to every arrangement, because the facts change the total.

• Premium: Driven by the face amount, the insured’s age and health, the policy type, and how the split divides the payment.
• Underwriting: Health questions are required, and issue may depend on insurability.
• Legal drafting: The split-dollar agreement and any buy-sell documents.
• Tax reporting: For employer-owned life insurance contracts issued after the date of the enactment of this section, the policyholder files a return under 26 U.S.C. § 6039I. It shows the number of employees, the number of insured employees, the total insurance in force, the policyholder’s name, address and taxpayer identification number, its type of business, and that it has a valid consent for each insured employee or, if not all consents were obtained, the number of insured employees for whom consent was not obtained.
• Agent compensation: The licensed agent may earn commission on the policy. Under Fla. Stat. § 473.3205, a CPA firm that accepts a commission must disclose that to the client in writing. We disclose it before the engagement.
• Accounting and tax fees: These are set out in a written engagement letter before work begins, with the variables listed.

Setup Steps and What to Expect Along the Way

Setup usually moves through five steps, from records to yearly administration. The insurer sets the underwriting timeline, so the pace varies.

1. Gather records. Collect ownership documents, the key person’s role and pay, and any existing buy-sell or shareholder agreements.
2. Hold a coverage review. Identify the parties, the regime and the policy type that fit the facts.
3. Complete underwriting. Answer the health questions and attend any exam the insurer requires.
4. Issue and document. The policy is issued, the agreement is drafted, and for an employer-owned contract the employee must be notified in writing that the employer intends to insure the employee’s life and of the maximum face amount, must give written consent to being insured and to coverage possibly continuing after employment ends, and must be informed in writing that the employer will be a beneficiary of any proceeds payable upon the employee’s death, all before the contract is issued.
5. Administer each year. Keep premium records and file the required tax reporting.

Missing records and consent forms can slow down an application. Gathering paperwork early keeps the process moving.

Why NR CPAs & Business Advisors and Common Questions

NR CPAs & Business Advisors is a Miami CPA firm. It provides accounting, tax and life insurance coverage review for families, professionals and business owners across the United States, including Indian-American households and business owners.

Florida law requires licensing for insurance work. Under Fla. Stat. § 626.112, no person may act as an insurance agent unless currently licensed and appointed. Nischay Rawal acts as a licensed insurance agent for these policies.

Talk With Us About Your Situation

If a split-dollar arrangement has been proposed to you, you don’t have to sort it out alone. A partner or employer may have raised it, or you may be trying to protect your family after a key person’s loss.

If you’re weighing one of these arrangements, contact NR CPAs & Business Advisors and call us today to set up a coverage review. We can work through the facts of your situation with you. Our goal is to help protect your loved ones and your business.