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).
Why use fixed indexed life insurance in an executive bonus plan?
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.
Bonus types on an executive bonus plan
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.
What’s the benefit of an executive bonus plan?
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.
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.
Not working with a financial professional currently? Contact us to structure an executive bonus plan for your key employees.
