Switch Dollar

Under Switch Dollar, the arrangement initially begins as Non-Equity Collateral Assignment Split Dollar. The employer pays the annual premium on a life insurance policy, which is owned for the executive (or executive’s trust). The policy is pledged, or collaterally assigned to the employer as collateral for repayment. Under the terms of the agreement, the employer is entitled to be repaid the greater of the cumulative premiums paid or the cash value. The death benefit in excess of the repayment amount is paid to the executive’s beneficiary. The executive pays income tax annually based on this share of death benefit, which is known as the economic benefit cost. Prior to any equity built up in the policy, the arrangement is “switched” to Loan Regime, resulting in the executive no longer being taxed under the economic benefit cost, but instead loan interest is charged at the applicable federal rate – which is typically accrued. This switch usually occurs between years 7-10.

Often in these arrangements, the employer retains the rights to the cash value and the death benefit up to the premiums paid by the employer. Sometimes, the employer earmarks an amount greater than the premiums paid. In some split-dollar arrangements, the employee has rights to any cash surrender value in excess of the employer’s contribution to the plan. If the employee pays into the plan, the employee’s beneficiaries may be entitled to an amount that’s proportionate to the employee’s premium payments.

How It Works

In a corporate split-dollar agreement, an employer and the employee are sharing the costs and benefits of a life insurance policy for whom the employee is the insured person. The agreement will describe how the death benefit is divided between each party, how each party can access cash (if applicable) and how each party can exit the agreement.

Final regulations provide two types of split-dollar life insurance arrangements: economic benefit regimes and loan regimes. Under the economic benefit regime, the employer owns the life insurance policy but allows the employee certain rights, such as the right to name beneficiaries. Under a loan regime, the employee owns the policy and awards an interest in the policy to the employer. The taxation of the arrangement depends on which regime is chosen.


  • In a loan split-dollar life insurance arrangement, a collateral assignment allows the employer to recoup its premium payments if the employee dies prematurely or exits the agreement. Collateral assignments apply to both the death benefit and the cash value in a life insurance policy.

Organization Perspective

  • You may use your portion of the death benefit for your personal use.

  • You can accumulate cash value more quickly due to the employer’s contribution.

  • Your beneficiaries receive a tax-free death benefit.

Key Considerations

  • The owner of the policy

  • The split of premium payments (if any) to the life insurance company

  • The division of equity between the parties.

Executive Perspective

  • The death benefit is specialized for each agreement.

  • The business can plan its premium contribution for each agreement.

  • The employer can control the flow of the cash value and death benefit you own.

  • The business has significant flexibility in nearly every portion of the plan design.

  • If the business is a C corporation, it may use the cash value to which it’s entitled for corporate needs.

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A Modern Approach to Executive Compensation & Retention

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