Executive Bonus Plan Advantages

The executive advantages of an executive bonus plan outweigh the benefits to the employer and include:

Post-retirement benefits
Limited cost
The use of corporate dollars, and
Portability and flexibility

Post-Retirement Benefits

Unlike many employer-provided benefits, the executive benefits derived from the bonus plan don't end when the executive's service with the employer ends.  An executive bonus plan provides additional life insurance benefits after his or her retirement.  Although the bonuses end at the executive's retirement, death benefits may remain in force, subject to policy provisions.  In addition, the executive may continue to pay premiums if he or she chooses, thereby increasing the cash values and, possibly, the death benefits.  

Limited Cost

The executive's modest cost is a distinct advantage and is limited to the tax liability on the bonused premium.  An executive in a 28 percent marginal income tax bracket whose $10,000 annual premium is bonused by the employer would pay $2,800 in federal income taxes.    Since the executive's cash value may have increased by $10,000 or more as a result of the premium payment, a $2,800 cost would represent considerable value.  Often, however, the executive has no cost at all because the employer bonuses the tax that is due on the bonused premium payment in a double-bonus executive bonus plan.   

Corporate Dollars Used to Meet Personal Needs

Executive bonus plans use employer funds to meet personal life insurance needs. Additionally, the policy's cash value is available for the executive to borrow against or withdraw funds from to meet any personal need.  

FIFO income tax treatment enables the executive to withdraw funds tax free to basis.  Basis is equal to the aggregate employer premiums on which the executive paid income taxes increased by any premium payments made by the executive.  

 Portable and Flexible

An executive bonus plan characteristic that is normally seen as an executive benefit is a disadvantage to the employer: portability.  Specifically, an executive bonus plan moves with the executive.  Although the employer would cease bonused premium payments, the cash value and death benefits would continue, subject to the terms of the policy.  

The flexibility that is typical of a life insurance policy enables the policyowner to assign the policy and remove its death benefit from his or her estate.  In addition, the executive may make a gift of the policy to children or assign it to an irrevocable life insurance trust to exclude it from his or her federal gross estate.