Under an executive bonus plan, an employer purchases and pays for a life insurance policy for a select group of employees. The employer pays for the policies via a pay raise to the employee(s) equal to the policy premium, and in some cases an additional bonus to cover the income tax on this additional pay. The employer is able to pick and choose specific employees to participate in the plan.
Employees have full rights to the policy and its cash value and can take tax-free income from the policy in the future. As a way to increase the plan's retaining power, a restrictive endorsement and vesting schedule may be added.
- Employee owns the policy and has control over the cash value and naming of the beneficiary
- Tax-free income is available from the policy via partial withdrawals and loans
- Cash values and policy values accumulate tax-deferred
- Employee chooses timing and amount of withdrawals
- Tax due on the bonus can be covered by an additional bonus from the employer
- Contribution limits are flexible
- Rewards key employees in a discretionary manner
- Easy to implement and maintain
- Premiums are immediately tax-deductible
- Employer is not obligated to make premium payments