Executive Bonus plan

An Executive Bonus plan using life insurance can provide a simple yet powerful retention and recruitment incentive to top performers. Adding cash value life insurance funded with after-tax dollars can help with these advantages:

  • An income tax-free death benefit for the beneficiaries
  • Tax-deferred growth opportunities
  • A tax-efficient financial resource through income tax-free policy loans or withdrawals*
  • No contribution limits or penalties for early withdrawals, unlike qualified plans 

Executive bonus plan infographic 6d

    

  1. Your business pays 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.
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

*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.