Split Dollar Agreement-Jim Harbough

A split dollar loan arangement is designed to use business dollars to pay the premium on a permanent life insurance policy that is owned by an individual (or a trust). A collateral assignment and written agreement is required to memorialize the terms of the loan agreement. The premium payment is made in the form of a loan from the business to the policy owner.

The policy owner pays the interest on the loan to the business or reports the interest as imputed income as specified in the loan agreement. The loan is repaid, generally, by taking loans or withdrawals from the cash value of the policy, or from the death benefit.1 The business will book the outstanding loan balance as an accounts receivable.

A business owner may choose to offer this benefit to key employees. The permanent life insurance is purchased on the life of the key employee and the business will recover its cost of the benefit when the outstanding loan balance is repaid. This is a benefit that can help attract, reward, and retain key employees.

The key employee will:

  • Own and control their permanent life insurance policy subject to a collateral assignment
  • Incur minimal out of pocket cost
  • Contribute to the plan via interest payments paid to the business, or report the interest due as imputed income and pay taxes on the amount at the employee’s personal income tax rate. The business will recover its costs through the repayment of the loan. The repayment terms may be flexible and may include a set term of years or a demand note.

Jim Harbough Example