Executive Bonus Plans
Employer and employee enter into an executive bonus (Section 162) life insurance arrangement, whereby the employer agrees to finance personal life insurance on the employee. The terms of the arrangement often are spelled out in a written agreement. - The employee applies for and owns an insurance policy on his or her own life.
- The employer pays the premiums on the life insurance policy owned by the employee.
- Or, alternatively, the employer gives the employee an annual cash bonus that the employee uses to pay premiums.
The employer's annual premium payments (or cash bonuses to the employee) are deductible, assuming the employee's total compensation is reasonable. The employee must report the employer-paid premium (or the cash bonuses) as gross income each year. The cash value increases in the policy inure to the benefit of the employee as policy owner. - Cash values can be accessed for emergencies or used to supplement retirement income when the employee retires.
- When the employee dies, his or her beneficiary will receive the death proceeds of the life insurance policy.
- Death proceeds of life insurance are usually received free of federal income tax.
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