When your small business clients have the right people working for their business, they want to offer benefits that make them feel valued. One option is a collateral assignment split dollar arrangement.

How this plan works

Under a collateral assignment split dollar arrangement, the business loans a key employee money to pay the premium on a life insurance policy. The employee pledges the policy as collateral for the loan. He or she owns the policy and has the ability to name the beneficiary, and is taxed on the interest-free element (the imputed interest income) of the loan.

Diagram of a collateral assignment split dollar arrangement, during the key employee’s working years; description above

Otherwise, upon the key employee’s separation from service or the end of the agreement, the employee pays back the loan to the employer. The agreement is then terminated, and the employee owns the life insurance policy free and clear.

Diagram of a collateral assignment split dollar arrangement, when the employee separates from service or at the end of the agreement; description above

Should the key employee pass away prematurely, the death benefit from the life insurance policy is used to repay the remaining balance due on the loan. Any remaining death benefit amount goes to the employee’s beneficiaries.

Diagram of a collateral assignment split dollar arrangement, if the key employee dies prematurely; description above

Potential benefits of the plan

  • It's both a recruiting and retention tool for valued employees
  • It has less administration and fewer filing requirements than qualified retirement plans subject to ERISA
  • The business owner can choose who receives benefits, when, and how much
  • It lacks the contribution limitations and regulatory rules associated with traditional qualified retirement plans
  • The company has the ability to recoup some of its investment when a valued employee separates from service, retires or dies
  • It offers flexibility in plan design to meet specific needs

 Drawbacks of the plan

  • A formal written contract is required to implement the arrangement
  • There's no guarantee that the employee will stay with the company once the contract term has ended
  • The plan may need to comply with Internal Revenue Code Section 409A


Share this brochure with your business client to illustrate the two types of split dollar arrangements using life insurance and to show how these plans can help recruit and retain valued employees.


Have small-business clients but don’t know which life insurance solution is right for their business? Answer a few questions and get a recommendation from the Nationwide Small Business Solutions Analyzer.

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For more information, contact the Solutions Center at 1-800-321-6064

As situations change, so will the business's life insurance needs. Care should be taken to ensure these strategies and products are suitable for the business's and the client's long-term goals. Weigh the business's objectives, time horizon and risk tolerance as well as any associated costs before investing. Also, be aware that market volatility can lead to the possibility of the need for additional premium in the policy. Variable life insurance has fees and charges associated with it, which include costs of insurance, underlying fund expenses and administration fees. Investing involves risk, including possible loss of principal. Nationwide and its representatives do not give legal or tax advice. An attorney or tax advisor should be consulted for answers to specific questions.

Variable life insurance has fees and charges associated with it that include costs of insurance that vary with such characteristics of the insured as gender, health and age, underlying fund charges and expenses, and additional charges for riders that customize a policy to fit their individual needs. Variable products are sold by prospectus. You can obtain the product prospectus and underlying fund prospectuses by writing to Nationwide Life Insurance Company, P.O. Box 182021, Columbus, OH 43218-2021. Before you invest, you should read the prospectus carefully and consider investment objectives, risks, charges and expenses. The product prospectus and underlying fund prospectus contain this and other important information.

Loans and withdrawals will reduce the death benefit. Most distributions will be taxed on a first-in/first-out basis, as long as the contract is not a modified endowment contract (MEC) according to Section 7702A of the Internal Revenue Code. Loans from a MEC are generally taxable and subject to a 10% tax penalty if taken before age 59 1/2. If the policy lapses with a loan outstanding, it will be treated as a distribution and some or all of the amount may be taxable.

Guarantees and protections are subject to Nationwide's claims-paying ability. They do not apply to the investment performance or safety of the underlying investment options.

Investment products are not FDIC-insured, may lose value and have no bank guarantee.