The executive bonus life insurance is one of the best ways to attract and retain quality employees. The executive bonus, or Section 162 bonus or executive benefit plan is a life insurance for a selected employee. An executive benefit plan is a method of compensating selected key employees by paying the premiums of a life insurance plans on the employee’s life.
Section 162 bonus is an efficient method for covering a key employee or the incorporated business owner. The premiums of 162 benefit plan are deductible by the employer as taxable compensation to the employee.
How Executive Bonus Plans Work
162 bonus is not the same as key employee insurance, which is intended to protect the business from losses resulting from the employee’s death. Rather, it is employer-financed personal life and disability insurance intended to benefit the selected employee. Under executive bonus plans, the employer pays a bonus each year to selected employees, typically either in cash or in the form of premiums on life insurance plans or disability plans on their lives. The employer pays the premium on the plan and includes that premium in the taxable wages of the employee. The employee owns the insurance plan, names someone as beneficiary other than the employer, and has all rights in the 162 bonus plan. The employer has no rights on the executive benefit plans cash values or death benefit.
With the executive bonus plans, the employer will take an income tax deduction under Internal Revenue Code (IRC) Section 162 for the amount of the bonus, which is usually equal to the premium. The employer can pay the 162 premium to an insurance company, to the employee or to the employee’s beneficiary.
The executive bonus life insurance plans can be completely selective in coverage. The employer is free to select the employees it wishes to benefit the plan, may they be executives, managers, or rank-and-file employees.