In an increasingly competitive workforce, many companies look for unique ways to attract and retain top talent. Some organizations offer employee packages that include a variety of perks and benefits to boost workplace satisfaction and catch prospective employees' attention. While many benefit packages include group life insurance, executive bonus plans using life insurance are different. “Executive bonus with a life insurance plan is one of the simplest and most effective 'golden handcuffs' an employer can provide for key employees,” says Sammons Financial Group Associate Vice President of Advanced Sales Strategy Andrew Rinn.
In fact, it can be offered specifically to chief executives or other key employees as an additional benefit. Here’s a closer look at this bonus arrangement and the different types of bonus plans available for executives.
Executive bonus plans using life insurance, also known as an executive bonus plan, is a type of individual life insurance that can be used to incentivize and reward key employees. The employee owns the policy and can choose who they wish to be the beneficiary. Typically, an executive bonus plan is a permanent life insurance policy with the potential to grow cash value tax deferred.1 This cash value can then be accessed through withdrawals or policy loans2 at a later time, often to help supplement retirement income.
Executive bonus plans can be offered to executives, owners or key team members of your business. This unique benefit option allows employers to reward long-term and high-performing employees with a bonus plan that provides advantages for both employers and employees.
Offering an employer-paid life insurance policy can provide benefits to both the employer and the employee and act as a positive way to attract, recognize, reward, and retain employees who are important to the organization.
An executive bonus plan is usually easy to implement and administer, and the company can choose which key employees it would like to offer this benefit to. Bonuses paid to the employee are generally tax-deductible to the employer and reportable as income to the employee. (The employer has the option to give the employee a double bonus to cover any taxes that may be due).
Several benefits may appeal to key employees who are offered executive bonus using life insurance. Along with protecting their family if the unexpected happens, employees may also have access to living benefits subject to eligibility requirements. Depending on the policy, they may be able to access the cash value for future needs. The benefit can also be used by accessing the cash and surrender values after the executive retires or leaves the company.
Split dollar life insurance plans using life insurance also known as endorsement split dollar plans are also common benefits used to retain key employees. However, the employer and employee may split policy benefits and obligations such as cash value, premium allocation and the death benefit of a life insurance policy. Split dollar plans may be set up differently depending on what works best for the company and the individual employee. Commonly, the employee has an opportunity to obtain life insurance benefits for minimal expense. Upon the death or retirement of the employee, the employer receives its interest in the policy. This interest is often an amount equal to the amount of premiums the employer paid. Any remaining death benefit is paid to the employee’s beneficiary. Or upon retirement, the policy may be transferred to the employee along with any remaining cash value.
Offering life insurance as part of a compensation package can help companies show that they care about their executives’ financial well-being and feel they are a valuable part of the organization. By providing life insurance options, employers can provide key employees with peace of mind and the ability to safeguard their loved ones’ future while supplementing their retirement or helping with future needs.
1. Midland National does not provide legal or tax advice. Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.
2. Policy loans from life insurance policies generally are not subject to income tax, provided the contract is not a Modified Endowment Contract (MEC), as defined by Section 7702A of the Internal Revenue Code. A policy loan or withdrawal from a life insurance policy that is a MEC is taxable upon receipt to the extent cash value of the contract exceeds premium paid. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10% additional tax prior to age 59½, with certain exceptions. Policy loans and withdrawals will reduce cash value and death benefit. Policy loans are subject to interest charges. Consult with and rely on your tax advisor or attorney on your specific situation. Income and growth on accumulated cash values is generally taxable only upon withdrawal. Adverse tax consequences may result if withdrawals exceed premiums paid into the policy. Withdrawals or surrenders made during a Surrender Charge period will be subject to withdrawal charges, processing fees, or surrender charges, and may reduce the ultimate death benefit and cash value. Surrender charges vary by product, issue age, sex, underwriting class, and policy year. Income and growth on accumulated cash values is generally taxable only upon withdrawal. Adverse tax consequences may result if withdrawals exceed premiums paid into the policy. Withdrawals or surrenders made during a Surrender Charge period will be subject to withdrawal charges, processing fees, or surrender charges, and may reduce the ultimate death benefit and cash value. Surrender charges vary by product, issue age, sex, underwriting class, and policy year.
Texas Residents: Receipt of acceleration-of-life-insurance benefits may affect your, your spouse’s or your family's eligibility for public assistance programs such as medical assistance (Medicaid), Aid to Families with Dependent Children (AFDC), supplementary social security income (SSI), and drug assistance programs. You are advised to consult with a qualified tax advisor and with social service agencies concerning how receipt of such a payment will affect your, your spouse’s and your family's eligibility for public assistance.
Under an endorsement split-dollar arrangement, you enter into an agreement with your employer. Midland National is not a party to this agreement and Midland National’s only obligation is to administer the policy it issues consistent with the policy’s terms and conditions.
Under an endorsement split dollar arrangement, the value of the life insurance afforded the employee is taxable to the employee. The employer should provide the employee with tax reporting based on requirements specified in the tax code. The parties to the endorsement split-dollar arrangement should seek their own independent legal and tax advice as to whether and how to enter into an endorsement split-dollar arrangement based on the employer’s and employee’s unique circumstances.