Life Insurance

Insurance for Businesses Series: Executive Bonus Plan

Peachie Thompson · August 27, 2021

Insurance for Businesses Series: Executive Bonus Plan

Successful business owners need ways to protect their companies, compete for top talent, reward employees and plan for a financially secure future. An excellent financial planner understands these needs and know the various roles insurance play in these situations. This is the third one of a 5-part series dedicated to businesses and the role of life insurance in solving some of the concerns of business owners.

Executive Bonus Plan

Smart business owners find ways to be able to retain, reward and recruit key talents to contribute to the success of their businesses. Your business owner clients could be worried about their top employees leaving for the competition or perhaps, they simply want to reward their top employees.

An executive bonus plan using life insurance can provide a simple yet powerful addition to the total executive compensation benefit package for key executives. The business owner maintains control of who will participate and can choose to provide a single bonus to the employee or “gross” the bonus up. There’s little to no out-of-pocket expense to the employee so it's very attractive.

If employee retention is a concern, companies can restrict the employee’s access to the policy’s cash value for a period of time, such as until retirement. We call this the "Golden Handcuff". Here are some of the reasons why an Executive Bonus Plan is a great solution for business owners worried about losing great talent to competition or wanting to reward top employees:

Advantages for the employee

  1. Employees own the policy and control the cash values
  2. Employees designate their own beneficiary
  3. A legacy asset that transfers to their beneficiary income tax-free
  4. Cash value that grows tax-deferred
  5. A tax-efficient income supplement through policy loans and withdrawals (note: loans and withdrawals reduce death benefit and policy values)

Advantages for the business

  1. Employers choose which employees can participate
  2. A plan that’s easy to execute, cost effective and flexible for both employer and employee
  3. An immediate tax deduction for the annual bonus paid (note that the deductibility of the bonus is subject to the reasonable compensation limits established by Internal Revenue Code Section 162(a).)

Win-Win

As you can see, taking care of employees help ensure the success of businesses. Why not do something that benefits both the business and the employees?

If you are a fee-only planner, advisor or a client and would like to know more about this topic, please email me at peachie@peachinsurance.net

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