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

Under a switch dollar plan, the arrangement begins as non-equity collateral assignment split dollar, which is taxed under the economic benefit regime. Prior to any equity building up in the life insurance policy, the structure of the plan is converted to loan regime, thus the executive is not taxed on any gains. The executive now has basis in the policy and will enjoy the tax-deferred growth and tax-advantaged access to policy cash values. 


  • Regulations Sections 61-22 and 7872-15 of the Internal Revenue Code (the “Code”) govern these arrangements. 

Organization Perspective

  • Annually funds the life insurance premiums

  • Receives the great of the cash surrender value or cumulative premiums paid upon the executive’s death

Key Considerations

  • Complex arrangement 

  • The switch does not happen automatically  

  • In a rising interest rate environment, there is inherent risks associated with this structure, as rates may be higher upon the conversion 

  • Any policy equity will be taxed as ordinary income to the executive, in addition to the one-year term costs for the death benefit coverage

Executive Perspective

  • Selects beneficiaries 

  • Receives cost effective death benefit coverage, as the employer typically grosses-up the imputed tax cost associated with this arrangement

  • In a high interest rate environment, if the executive is young or the policy is joint life, this is a more attractive option than loan regime split dollar.

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