One solution is the executive bonus plan, a simple, tax-deductible way to provide personally owned life insurance for shareholders and selected employees. The plan is ideal for an employee who needs additional insurance protection and is willing to receive a bonus in the form of life insurance instead of a salary increase or cash bonus. No formal IRS approval is needed.
Under an executive bonus plan, the corporation selects plan participants and decides how much life insurance to provide. Participating employees apply for and own the policies and name the beneficiaries. Note: This plan is also available to employees in sole proprietorships and partnerships.
The employer pays all the premiums, which represent bonuses to the employee, and deducts the premiums as a business expense. The employee pays income tax on the amount of the bonus. Policy loans can be used to offset the cost of the insurance; or, the employee can pay the tax each year using interest from a universal life policy or tax-free dividends from a participating policy.
Under a "double-bonus" plan, the employer bonuses the premium and the amount of the annual tax on the bonus.
Different amounts of coverage can be provided to each participant. However, the amount of the bonus when added to the insured's other compensation must be considered "reasonable" for services actually rendered.
If the plan is canceled or the employee leaves the company, the insured can:
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