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Many hospital-employed physicians were offered split dollar plans when interest rates were near zero. Back when AFRs were sitting at 1–2%, the math was forgiving and the strategy made a lot of sense.

Today, AFRs are approaching 5%.

That changes things. If you’re participating in — or being offered — a loan regime split dollar plan, the real question isn’t whether it’s a good strategy in theory. It’s whether it still works at today’s rates.

Here’s what you need to know.

How Loan Regime Split Dollar Works

The structure is straightforward. The physician owns the life insurance policy. The hospital loans the premium. That loan accrues interest at the IRS Applicable Federal Rate (AFR). At retirement or death, the loan plus interest is repaid from policy values — and the physician keeps what’s left.

Learn more about how split dollar life insurance works.

What a High AFR Actually Does

A higher AFR does three things: it grows the loan balance faster, raises the performance hurdle the policy needs to clear, and compresses net equity at retirement.

When AFR was 2% and policies were projecting 5–6% returns, there was real spread to work with. When AFR is near 5% and those same projections show 5.5–6%, the spread nearly disappears.

At that point, this stops working as an arbitrage strategy. It becomes structured deferred compensation with an insurance component — which isn’t necessarily bad, but it’s a different conversation.

When It Still Makes Sense

Split dollar isn’t broken at higher rates — it just requires more context. It tends to work well when the physician expects long tenure with the organization, when the plan includes loan forgiveness or a meaningful vesting schedule, and when the death benefit itself has real value to the physician’s family. It also makes more sense once the 403(b) and 457(b) are already maxed.

See our full breakdown of split dollar life insurance considerations.

Split Dollar vs. 457(f) vs. Taxable Investing

For nonprofit-employed physicians evaluating supplemental retirement strategies, the comparison that matters is between split dollar, the 457(f), and disciplined taxable investing.

The 457(f) is company-funded, like split dollar: there’s no cap on what the hospital can contribute, but the benefit carries a substantial risk of forfeiture and is taxed as ordinary income the moment it vests, whether or not it’s actually paid out. The main risk is the same employer credit exposure that applies to any non-governmental unfunded plan. (This is separate from the 457(b) — a smaller, physician-funded voluntary plan, similar to an extra 401(k), that’s worth maxing out on its own regardless of what else is on the table.) Split dollar offers employer-funded premiums, death benefit leverage, and tax-deferred growth — but comes with AFR-driven interest accrual, real early exit risk, and performance sensitivity that needs ongoing attention. Taxable investing gives you full liquidity and transparent costs, with long-term capital gains treatment partially offsetting the tax drag.

For most nonprofit physicians, the decision hierarchy is pretty clear: max the 403(b) and 457(b) if available, then evaluate split dollar honestly against 457(f) based on your tenure expectations and appetite for forfeiture risk, then consider taxable investing.

The Early Exit Problem

Split dollar plans are often described as retirement benefits. In practice, they’re also retention tools — and in a high AFR environment, that distinction matters more than ever.

Take a typical structure: the hospital loans $150,000 per year for five years ($750,000 total) at a 4.5% AFR, with retirement at year 20. A physician who leaves in year seven will likely find the loan balance exceeds the policy’s cash value. That means repaying the difference out of pocket or surrendering the policy. Net equity is often negative in the early years — by design.

Stay through year 20 and the picture changes. The policy’s tax-deferred compounding has time to outpace the loan growth, and meaningful equity builds.

The structure rewards longevity. Physicians considering these plans should go in with that clearly understood.

Closing Thoughts

From hospitals to physician groups to health districts to Federally Qualified Health Centers, every organization faces different challenges around physician talent. We work with leading organizations to address those challenges through strategic executive benefit planning. See our physician retention benefits guide for more.

For more information about how executive benefit plans can help your organization attract, retain, and reward key talent, contact EBS today.

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