Executive Bonus plan

An Executive Bonus plan using life insurance can provide a simple yet powerful retention and recruitment incentive to top performers. Another advantage is the business may be able to take a current tax deduction for the bonus paid in the executive bonus plan.

Executive bonus plan infographic

 
  1. Your business pays a tax-deductible bonus* to fund premiums for a life insurance policy owned personally by the employee.
  2. Your employee designates a beneficiary for the death benefit and may have access to policy cash values, if any. The employee may have access to policy cash values on a tax-favored basis to address personal needs such as supplemental retirement income. 
  3. Your employee pays income tax on the bonus received.
  4. At death, your employee’s beneficiary receives the death benefit proceeds, generally income tax-free.
     
Considerations for the business
  • The business has discretion regarding which employees can participate.
  • The plan is easy to implement and maintain.
  • The business receives an immediate tax deduction for the bonus paid.* 
Considerations for the employee
  • The employee owns the policy, has control of the cash value, and names the beneficiary.
  • Tax-advantaged income may be available from the policy through partial withdrawals and loans.*
  • Cash values accumulate tax-deferred.
  • Death benefit proceeds are generally received income-tax free.

Man in a comfortable shirt smiling with his arms folded

Read our case study:  Keeping your competitive edge (PDF)

*Income tax-free loans and withdrawals will reduce the policy’s cash value and death benefit. Distributions are taken through loans and withdrawals, which reduce a policy’s cash value and death benefit and may cause the policy to lapse. Loans are not considered income and are tax-free. Withdrawals and surrenders are tax-free up to your cost basis, provided your policy is not a modified endowment contract (MEC). A MEC policy is one in which the life insurance limits exceed certain high levels of premium or the cumulative premium payments exceed certain amounts specified under the Internal Revenue Code. For policies that are MECs, distributions during the life of the insured, including loans, are first treated as taxable to the extent of income in the contract, and an additional 10% federal income tax may apply for withdrawals made prior to age 59½.