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Business owners

Executive bonus plans

A simple way to reward and help retain key people with life insurance they own.

About a 5-minute read

What it is

Sometimes called a Section 162 plan. The business pays the premium on a permanent life insurance policy owned by a key employee, as a bonus. The employee owns the policy and controls the death benefit and cash value.

Who it's often for

Businesses that want to reward selected employees or owners without the rules and administration of a qualified retirement plan.

How it works

Scene 1

The flow at a glance

The business pays a bonus to the employee, which goes to the insurance company as the premium. The insurance company issues a policy the employee owns, with cash value and a death benefit.
  1. 1The business chooses who participates.
  2. 2The employee applies for and owns the policy.
  3. 3The business pays the premium as a bonus, which is generally deductible to the business as reasonable compensation.
  4. 4The bonus is taxable income to the employee; some businesses pay an extra bonus to cover that tax ("double bonus").
  5. 5To encourage retention, some plans add a restrictive agreement that limits the employee's access to the policy for a set period.

What to watch out for

  • The employee pays income tax on the bonus.
  • Without a restrictive agreement, the employee can leave and take the policy.
  • Permanent life insurance has costs and charges, and the policy needs ongoing funding and review.
  • Compensation must be reasonable to be deductible.

Questions to ask before moving forward

  • Who should participate?
  • Should we add a restrictive agreement for retention?
  • Will we cover the employee's tax cost?
  • What happens to the policy if they leave?

Who else should be involved

Your CPA (deductibility and payroll reporting) and attorney (any restrictive agreement).

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Advanced concepts are described in general, simplified terms for education only. They involve legal, tax and financial considerations that depend on your situation and on current law, which can change. IAM Money Management does not provide tax or legal advice; consult your attorney and tax professional before implementing any strategy. Life insurance and annuity products are issued by insurance carriers, and features, costs and guarantees vary by carrier, product and state. Guarantees are backed by the claims-paying ability of the issuing carrier.