Reward and retain key employees through an executive bonus plan using life insurance

In an increasingly competitive workforce, many companies look for 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 for all employees, 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.

What is an executive bonus plan using life insurance?

Executive bonus plans using life insurance, also known as an executive bonus plan, uses individual life insurance 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 uses 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, including use as a supplement for retirement income.

Who is eligible for an executive bonus plan using life insurance?

Executive bonus plans can be offered to executives, owners or key team members of your business. This benefit option allows employers to reward long-term and high-performing employees with a bonus plan that provides advantages for both employers and employees.

What are the advantages of an executive bonus plan?

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.

Employer benefits of an executive bonus plan

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. (Subject to approval by the issuing life insurance company). 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).

Employee benefits of an executive bonus plan

Several benefits may appeal to key employees who are offered an executive bonus using life insurance. Along with protecting their family if they pass away, 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

Split dollar life insurance plans using life insurance-also known as endorsement split dollar plans-are also common options used to retain key employees. However, the employer and employee may split policy benefits and obligations such as potential cash value and the death benefit of a life insurance policy. Split dollar plans may be set up differently depending on what works best for the employer and the individual employee. Commonly, the employee has an opportunity to apply for and obtain a life insurance policy for minimal expense. Upon the death of the employee, the employer is reimbursed for its premium payments to the policy from the death benefit. Any remaining death benefit is paid to the employee’s beneficiary. Or upon retirement, the company is reimbursed for premiums paid from the cash value, and the policy may be transferred to the employee along with any remaining cash value.

Leveraging life insurance employee benefits

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 help provide key employees some peace of mind and the ability to safeguard their loved ones’ financial future while using potential cash value to help supplement their retirement income or future financial 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.

B3-MN-1-24
REV 9/26