What is executive bonus life insurance?
Executive bonus life insurance is used by business owners. The business enters an agreement under which the employer agrees to pay the executive an annual bonus. The bonus will be an amount which pays the premium on a policy owned by the employee. The bonus will also typically pay any income taxes incurred on the bonus.
The bonus paid by the employer is tax deductible to the business if reasonable compensation under section 162 of the tax code.
Who can benefit?
Executive bonus life insurance plans are a desirable way for business owners to reward key employees by offering a combination of life insurance and the potential cash surrender value of the policy.
This benefits the business by providing a way to retain valuable employees, thereby protecting against the loss of key accounts, vendor confidence and diminished earnings.
These plans also can help improve employee morale. For the key employee, an executive bonus life arrangement offers valuable life insurance for little or no out-of-pocket cost. And, because the employee is the owner of the policy, how it’s used is up to the individual.
They can leave the full death benefit to their heirs, or use the potential cash value to help supplement their retirement income. It really is a win win for both parties.
In summary, executive bonus life insurance provides a supplemental death benefit for the executive, a tax deduction for the company, and a potential income tax free way to supplement the executives retirement income.
Why life insurance?
Executive bonus plans are a non-cash benefit that can improve employee morale and retention. Unlike most other benefits, an executive bonus arrangement does not have to be offered to all employees, so it exclusivity increases its value.
In addition to other incentives offered by the company, an executive bonus life insurance plan allows the business to shift funds out of the corporation in an efficient, tax-deductible manner.
Meanwhile the employee gains the added benefit of life insurance coverage and the potential for an additional income stream at retirement.
How it works
The process is pretty simple. A company will typically identify key executives who can participate in the plan. Remember, this is a discretionary plan and can be offered to whoever the company or board decides. An agreement is drawn up stating that a bonus will be paid as additional compensation for the executive.
The bonus must be used to purchase a cash value life insurance policy for an amount of coverage determined by the business. The executive then applies for an owns the policy. The employee names is own beneficiary.
Premium payments in the form of the bonus can be paid to the employee or direct to the company. On some occasions a double bonus can be paid that pays not only the premium but any tax the employee must pay on the bonus compensation.
The immediate benefit to the employee is the death benefit protection, which can provide peace of mind for the employee and their family. Any accumulated cash value of the insurance policy can be used while the employee is living.
If, for example, the employee becomes disabled, is terminated, or leaves the company, the owner of the policy(employee) could use the cash value to help with the financial impact of the situation.
Real life example of using executive bonus life insurance
Daniel is a key employee at GoGolf Inc., a growing company that produces and distributes golf carts across the U.S.
The company is set up as an S-Corporation and employs close to 400 people. Daniel is a non-shareholder employee who oversees sales and marketing. Over the last 10 years, Daniel has consistently grown market share in his sales territory, and has produced numbers that exceed the company’s expectations. While Daniel’s region has grown, other sales regions are producing more modest results.
In a quarterly shareholder meeting, the president of GoGolf decides that Daniels invaluable expertise could be used to train select employees to achieve better results. The company will add to Daniel’s compensation for those extra responsibilities with a bonus arrangement.
After a conversation with his insurance agent, Daniel is interested in an executive bonus life insurance arrangement. Daniel feels that he can accomplish his life insurance goal and help supplement retirement income at minimal out-of-pocket costs with an executive bonus life insurance arrangement.
Daniel advises the company that he is interested in this type of compensation and would like a double bonus arrangement.(The double bonus arrangement not only pays the premium for the life insurance but any tax on the premium that would be considered taxable compensation).
With this double bonus arrangement, Daniel will not have any out-of-pocket expense.
Both parties agree to this arrangement and Daniel applies and qualifies for a universal life policy. Daniel gets to take advanatage of having the death benefit protection, tax-deferred cash value accumulation, and potentially tax-free income stream all in one solution.
GoGolf is happy because the double bonus arrangement provides an incentive for Daniel to stay with the company, and GoGolf’s bottom line will ultimately benefit by having Daniel around for years to come.
SCENARIO 1-
Daniel is now in his late 50’s and plans on retiring in the next five years. The unexpected happens, and he suffers a fatal heart attack. This is a difficult moment for Daniel’s family, friends and co-workers. But, having the additional life insurance helps make the process easier. Daniel’s spouse uses the death benefit protection as a form of income replacement.
SCENARIO 2-
It’s been five years since the executive bonus life plan was put in place. Daniel has been approached by a headhunter to work for a rival company. He now finds himself analyzing his options.
A quick review of his life insurance policy shows how much cash value he has already accumulated thru the executive bonus life insurance arrangement. The competing company cannot match the package that GoGolf is already providing him. Daniel decides to stay put, and GoGolf has retained a valuable employee.
SCENARIO 3-
Daniel is now 64 and ready to retire. Over the years his life insurance policy has accumulated cash value on a tax-deferred basis. Daniel plans to take distributions from the policy using very favorable variable loan rates to help supplement his retirement income. Simultaneously, the cash value of his policy continues to earn interest at a competitive market rate.
If you would like more information on how an executive bonus life insurance arrangement may work for you or a key executive, please contact us at 1-888-393-9003 or mike@specialriskterm.com
