Executive Bonus Arrangements Using Life Insurance (IUL) – A Powerful Tax-Efficient Benefit Strategy

Introduction

An Executive Bonus Plan (Section 162 Plan) using Indexed Universal Life (IUL) insurance is a tax-advantaged compensation strategy that allows businesses to reward key executives while providing life insurance benefits and long-term wealth accumulation. This arrangement enables employers to offer tax-deductible compensation while providing employees with tax-free income potential and death benefits.

Executive Bonus Plans are commonly used by business owners to attract, retain, and reward top executives without the administrative burdens of qualified retirement plans. These plans offer flexibility, tax efficiency, and asset protection, making them an ideal supplement to traditional executive compensation packages.

What is an Executive Bonus Plan?

An Executive Bonus Plan (EBP) is an agreement where a business pays for an IUL insurance policy on behalf of a selected executive. The executive is the owner of the policy, and the employer funds the premium through either:

• Single Bonus: A direct premium payment (taxable to the executive)

• Double Bonus: A premium payment plus an additional cash bonus to cover the executive’s income tax liability

Unlike other executive compensation methods, EBPs do not require IRS approval, making them easy to establish and administer.

How It Works:

1. Employer selects key executives to participate in the plan.

2. Employer funds the IUL policy through direct premium payments (reported as income to the executive).

3. Executive owns the policy, controls cash value growth, and names beneficiaries.

4. Policy accumulates cash value, which grows tax-deferred over time.

5. Executive can access tax-free income via policy loans and withdrawals in retirement.

6. Upon death, beneficiaries receive a tax-free death benefit.

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Why Use Indexed Universal Life (IUL) Insurance in an Executive Bonus Plan?

Indexed Universal Life (IUL) insurance is the preferred product for Executive Bonus Plans because it provides:

• Tax-Free Income Potential – Cash value can be accessed tax-free via policy loans.

• Tax-Free Death Benefit – Provides financial security for the executive’s family.

• Market-Linked Growth – Cash value accumulates based on indexed market returns with downside protection.

• No IRS Contribution Limits – Unlike qualified plans, contributions are not capped.

• Creditor Protection – In many states, life insurance policies are protected from creditors.

Tax Benefits of an Executive Bonus Plan

1. Employer Tax Benefits:

• Premium payments are considered reasonable compensation, making them 100% tax-deductible as a business expense.

• Unlike traditional retirement plans, there are no payroll taxes on contributions.

• No IRS filing requirements or nondiscrimination testing are needed.

2. Employee Tax Benefits:

• Tax-Free Cash Accumulation – IUL policies grow tax-deferred, meaning no annual tax liability on growth.

• Tax-Free Withdrawals & Loans – Executives can access policy cash value tax-free in retirement using loans.

• Tax-Free Death Benefit – The policy’s death benefit is received by beneficiaries income-tax-free.

Advantages of an Executive Bonus Plan Using IUL

1. Attract and Retain Key Talent

• Business owners can reward executives with a long-term wealth-building benefit.

• The policy can be structured with vesting schedules to incentivize employee retention.

2. Tax-Advantaged Retirement Income

• Unlike 401(k) or profit-sharing plans, there are no contribution limits.

• Employees can access funds tax-free in retirement, unlike traditional qualified plans that require RMDs (Required Minimum Distributions).

3. Business Simplicity and Flexibility

• No IRS approval or ongoing compliance requirements.

• Employers can choose who participates—unlike qualified plans that require broad employee inclusion.

4. Creditor & Legal Protection

• In many states, life insurance cash value is protected from creditors.

• Provides asset protection that other compensation strategies lack.

Types of Executive Bonus Plans

1. Single Bonus Plan

• The employer pays policy premiums directly to the insurance company.

• The executive reports the premiums as taxable income.

• Ideal for lower tax-bracket employees who can absorb the additional tax burden.

2. Double Bonus Plan

• The employer pays an additional cash bonus to cover the executive’s tax liability.

• Ensures that the executive receives a completely tax-free benefit.

• Ideal for high-income executives who need to avoid additional tax burdens.

3. Restricted Executive Bonus Plan (REBA)

• Employers place restrictions on policy ownership and access to funds.

• Ensures that the executive must remain with the company for a specified period before taking full ownership.

• Encourages long-term retention of key employees.

Comparing Executive Bonus Plans to Other Compensation Strategies

Feature	Executive Bonus Plan	401(k) Plan	Deferred Compensation Plan
Employer Tax Deduction	✅ Yes	✅ Yes	❌ No (unless distributed)
Employee Tax-Free Growth	✅ Yes	✅ Yes	✅ Yes
Tax-Free Retirement Income	✅ Yes (via policy loans)	❌ No (taxed at withdrawal)	❌ No (taxed at distribution)
Employer Contributions Required?	❌ No	✅ Yes (if matching)	✅ Yes
Creditor Protection	✅ Yes (varies by state)	❌ No	❌ No
IRS Compliance Requirements	❌ No	✅ Yes	✅ Yes

Who Should Consider an Executive Bonus Plan?

• Business Owners – Reduce tax burdens while rewarding themselves and key employees.

• Executives & High-Income Earners – Build tax-free retirement income beyond 401(k) limits.

• Physicians, Attorneys, & Consultants – Professionals who need tax-efficient wealth accumulation.

• Small-to-Medium-Sized Business Owners – A simple, flexible way to retain top talent without ERISA constraints.

Setting Up an Executive Bonus Plan

1. Choose Key Participants – Select executives and determine contribution levels.

2. Select an IUL Policy – Work with a financial professional to customize policy terms and benefits.

3. Determine Bonus Structure – Decide between Single Bonus, Double Bonus, or REBA. Implement a Vesting Schedule (Optional) – Add retention incentives if desired.

4. Fund the Policy – The employer pays premiums, and executives take ownership.

5. Monitor & Adjust – Regularly review policy performance and adjust contributions.

Conclusion

An Executive Bonus Plan using Indexed Universal Life (IUL) insurance is a powerful, tax-efficient compensation tool that allows businesses to reward and retain key executives while offering tax advantages for both the employer and employee. Unlike traditional retirement plans, Executive Bonus Plans provide flexibility, tax-free income potential, and simple administration without IRS restrictions.

For business owners seeking a cost-effective alternative to 401(k) and deferred compensation plans, an IUL-based Executive Bonus Plan can be a game-changer for employee retention, tax savings, and long-term financial security.

Consult a financial professional to structure the ideal Executive Bonus Plan for your business!