Executive Bonus Plans

What Is An Executive Bonus Plan?

This employee benefit is known for its simplicity and ease of administration. It allows business owners to provide key employees with cash value life insurance, with a portion (up to the entirety) of the premiums paid -- and fully deductible -- by the business. While employees pay tax on the premium as "other compensation," the policy's cash values can be used to offset the tax liability. This can be a tremendous enhancement to your company's benefit Package

If you have employees you wish to single out for a supplemental benefit and they have no immediate need for a cash bonus or raise, but would prefer the benefits of a life insurance policy's immediate death benefit protection, as well as the long-term advantages of a policy that can accumulate a cash value. This will work well.

How Does It Work?

Upon company approval, the employee purchases life insurance on his or her own life. The employee owns the policy and names the beneficiary; the business pays a portion of the annual premium. The premiums are tax deductible to the business, but taxable income for the employee.

Benefits to your Business:

As the business owner, you decide which employees receive this benefit and how much of a "bonus" (paid in premium payments) each employee deserves. You cannot cancel the policy, however, you can increase, decrease or terminate the arrangement at any time.

One big advantage is the ease of administration. IRS approval is not required (Administration is generally a matter of having an agreement drafted by an attorney and paying the premium on the policy each year) and the premium is tax deductible by the business in the year it is paid.

Benefits to the Employee:

A valuable benefit at a discounted price is received.  (The employee pays the tax on the premium rather than paying the premium itself.) The Life insurance protection, with the tax-free death benefit is payable directly to the employee's beneficiary and the employee owns the policy outright.  If the employee leaves, he or she can simply take over premium payments.

In addition the employee has control over any cash value accumulated in the policy, which grows on a tax-deferred basis. Depending on how the cash values accumulate and how the employee uses them, the policy has the potential to increase in value far beyond the tax liability of the premiums.

An Example of a Working Scenario

When his employer offered Dale an Executive Bonus Plan, he readily agreed. He purchased a $1,000,000 policy, with a $8,000 annual premium, which the company paid. While this added $2,480 to his income taxes, however the cash value grew rapidly.  Ten years later, when he left the company, he had paid a total of $24,800 in additional taxes, but the policy's cash value had grown significantly. Plus, he had the $1,000,000 death benefit. The company had paid $80,000 in premiums and was able to deduct the full amount.

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Bringing Children into the Family Business 

What is a Fixed Annuity
What is a Variable Annuity 

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Content is for informational purposes only and may not accurately reflect your specific situation. Information is not intended to provide legal, tax, or accounting advice. You should consult a qualified advisor for advice specific to your own circumstances.