Employers across the country want to recruit, retain and reward top talent. One option that can help with that goal is an executive bonus plan.
In its simplest definition, an executive bonus plan is a cash value life insurance policy that employers can provide to their key employees.
Under the terms of a written legal agreement, the employer covers the cost of the life insurance policy by either paying the premiums directly or through a cash bonus to the key employee allowing them to pay the policy premium themselves. This is a collaborative agreement between an attorney, the employer and the employee. It could include conditions for receiving the cash value, such as a service agreement or a vesting schedule.
Generally, the premium payments are deductible by the employer and considered additional taxable compensation to the employee.1 The key employee owns the life insurance policy, designates the beneficiary and may access other benefits (e.g., cash value and accelerated benefits).
PremiumsKey Employee(s)EmployerPolicyAgreement
Bonus plans funded by life insurance hold all of the same benefits as an individually owned policy, but they’re funded by the employer. The cash value grows tax-deferred, and income can be tax-free if structured properly.2
Using fixed indexed universal life insurance (FIUL) to fund an executive bonus plan provides an accumulation focus and access to death benefit riders. Therefore, the key employee is able to accumulate cash value within their policy for distributions down the road, like in retirement.
In both the single and double bonus options, the employer pays the bonus into the life insurance policy. The difference comes in with how the employee pays any taxes due on the bonus. In the single option, the employee pays the taxes due on their own. In the double option, the employee pays any taxes due using additional bonus money paid to the employee by the employer.
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Single Bonus |
Double Bonus |
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Employer pays bonus into life insurance |
Employer pays bonus into life insurance |
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Key employee pays any taxes due on that bonus |
Key employee pays any taxes due using additional bonus money paid by the employer |
This type of plan is a win-win for both the key employee and the employer. The key employee gains additional compensation through an employer-paid life insurance policy and can feel appreciated for their hard work, and the employer is able to retain and reward a key employee.
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Employee Benefits |
Employer Benefits |
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Provides long-term financial incentives |
Potentially more tax-efficient way to reward top talent |
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Offers another financial vehicle that isn’t subject to qualified plan limits |
Easy to communicate and maintain due to its simple and flexible design |
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Protects the families of key employees if the unexpected happens |
Provides employees additional compensation at a fraction of the current cost to the employer |
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Offers access to living benefit riders, such as critical illness, chronic illness and terminal illness riders |
Depending on the plan design, can reinforce the mutually beneficial relationship to retain key employees |
At the end of the day, an executive bonus plan is simply another tool in the toolbox that an employer can use to recognize and retain their key employees.
Interested in providing your employees with an executive bonus plan? Get in touch with a financial and insurance professional today: fglife.com/contact/talk-to-agent.html or call 800.357.8735.
1Deductions are subject to reasonable compensation restrictions (Internal Revenue Code Section 162(a). Subject to state availability. Certain restrictions may apply. Issuance may be dependent on answers to the health questions on the application.
2Surrenders, withdrawals and loans will reduce available death benefit and may be subject to surrender charges. Surrenders and withdrawals beyond basis may be taxable income and subject to penalties if taken prior to age 59 ½. Excessive and unpaid loans will reduce policy values and may cause the policy to lapse. In order to receive favorable tax treatments on distributions made during the lifetime of the insured (including loans), a life insurance policy must satisfy a 7-pay premium limitation during the first seven policy years. A new 7-year limitation will be imposed after certain policy changes. Failure to satisfy this limitation would cause your policy to be considered a Modified Endowment Contract (MEC).