Executive Bonus Plan
TARGET MARKET
An Executive Bonus Arrangement is an excellent choice for an employer looking to add an extra incentive to the compensation packages of its best employees. But first, to ensure a bonus plan meets the employer’s objectives, consider asking the business owner the following questions:
- Do you have employees that you want to reward and retain because of their value to your business?
- Are these employees loyal to you and your business?
- Is there a risk these employees might be recruited away by your competitors?
- Do you want a plan that is easy to establish and inexpensive to administer?
- Do you want a plan that offers design flexibility among employees regarding the amounts of coverage and premium?
- Do you have a budget amount you are willing to contribute to the plan?
- Do you want a plan that provides a current income tax deduction for your business?
- Do you desire to provide these employees a specific amount of death benefit protection?
Situations suitable for an executive bonus plan:
- Any successful business that is looking to recognize and reward its key employees
- Employers that want to sweeten compensation packages in a tight labor market
- Small businesses that cannot afford the costs of funding and administering a qualified retirement plan
- Companies that currently offer qualified retirement plans, but want to do more for their top employees
- Partnerships that desire to distribute to a partner more company profits than their equity share in the partnership
- A family business with family members as key employees
- Providing a premium source to fund a cross-purchase buy-sell among shareholders
- Providing group term carveout life insurance benefits to a select group of employees
Benefits to employees:
- Life insurance premiums can consume a meaningful amount of an employee’s budget to provide the level of benefits desired for their family. Employer paid premiums frees up their personal money for other expenses or savings opportunities.
- The employee’s designated beneficiary may receive the death benefit income tax-free
- The employee may have access to the death benefit under any living benefit rider for terminal, chronic, or critical illness
- Generally, cash value in the policy grows income tax-deferred
- There are no complex RMD rules or penalties for accessing the values before age 59 ½ (unless the policy is a MEC)
- The policy cash value may be available for emergencies, to supplement retirement income, or for other needs
- The cash value and death benefit may be used as collateral to help secure a consumer loan
- The employee is fully vested from the start of the arrangement and owns the policy
- The policy is protected from business creditors
Benefits to employers:
- Ability to discriminate and select only the employees they want to reward
- Design flexibility between employees regarding the amounts of coverage and premium
- Funding flexibility, which can be tied to performance standards
- Deductibility of contributions (if compensation is reasonable)
- No minimum or maximum contribution requirements (but note the $1 million limit on executive compensation that the employer can deduct discussed in the Technical section)
- Ability to implement, modify, or terminate the plan without IRS approval or restrictions
- No third-party administration is needed
- Encouragement of good employee behavior, promotion of company loyalty, and retention of valued employees
- The plan comprising one part of an overall compensation package to recruit high quality employees in a tight employment market
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1 The use of cash value life insurance to provide a tax-free resource for accumulation goals assumes that there is first a need for the death benefit protection. The ability of a life insurance contract to accumulate sufficient cash value to help meet accumulation goals will be dependent upon the amount of extra premium paid into the policy, and the performance of the policy , and is not guaranteed. Policy loans and withdrawals reduce the policy’s cash value and death benefit and may result in a taxable event. Withdrawals up to the basis paid into the contract and loans thereafter will not create an immediate taxable event, but substantial tax ramifications could result upon contract lapse or surrender. Surrender charges may reduce the policy’s cash value in early years.
2 Life insurance generally provides a tax-free death benefit (Per Internal Revenue Code § 101(a)(1). There are some exceptions to this rule. Please consult a qualified tax professional for advice concerning your individual situation.
National Life Group® is a trade name of National Life Insurance Company, Montpelier, VT, Life Insurance Company of the Southwest, Addison, TX and their affiliates. Each company of National Life Group is solely responsible for its own financial condition and contractual obligations. Life Insurance Company of the Southwest is not an authorized insurer in New York and does not conduct insurance business in New York.
Brochures and flyers linked to in this communication are approved for print use only. Please note that email marketing is subject to additional anti-spam requirements and should be submitted for advertising compliance approval prior to use. Seminars should be submitted for review of your personalization along with any invitations, announcements or other collateral marketing materials.
The companies of National Life Group® and their representatives do not offer tax or legal advice. Please encourage your clients to seek tax or legal advice from their appropriate professional advisor.
No bank or credit union guarantee | Not a deposit | Not FDIC/NCUA insured | May lose value | Not insured by any federal or state government agency
Guarantees are dependent upon the claims-paying ability of the issuing company.
FOR AGENT USE ONLY - NOT FOR USE WITH THE PUBLIC
TC141219(0424)3 | Cat 106284(0424)