Deductible bonus, executive-owned policy
Simple, selective, no qualified-plan testing.
Business uses · Executive bonus
Executive bonus plans (Section 162): how companies fund a key employee’s IUL — and keep them
An executive bonus plan is the simplest way a company can fund a valuable, portable benefit for a key employee: it pays the premiums on a permanent policy the executive owns, deducts the payment as compensation, and — with a restrictive endorsement — makes walking away costly. Here’s how it works, honestly, and where IUL fits inside it.
Who this is for: Business owners designing retention packages, and executives being offered one.
The mechanics
The employee owns a permanent life insurance policy — IUL or whole life. The company pays the premium and treats it as a bonus: deductible to the company as reasonable compensation, taxable to the executive as income. In a “double bonus,” the company also bonuses the tax so the executive nets zero out of pocket. There’s no qualified-plan paperwork, no nondiscrimination testing, and the company can choose who participates. Because the executive owns the policy, the employer-owned-policy notice-and-consent rules don’t apply — the policy is simply the executive’s.
Retention, and where IUL fits
Portability is the benefit and the problem: an executive who leaves takes the policy. A restricted executive bonus arrangement adds an endorsement — the executive agrees not to access the cash value without company consent until a vesting schedule is met, and a separate agreement may require repaying bonuses on early departure. That creates the golden handcuffs. IUL suits the structure when the executive wants accumulation potential with flexible premiums the company can vary with results; whole life suits it when the executive values guarantees. Either way the executive gets a permanent death benefit and a cash-value asset that, once vested, is fully theirs — the honest reason these plans retain people.
The essentials
What actually matters here
Double bonus nets the executive zero
The company bonuses the tax on the premium bonus.
Restricted endorsement = handcuffs
Vesting the cash-value access makes leaving costly.
IUL can genuinely fit when…
- A key employee the company wants to retain for years
- A company that wants a deductible, selective benefit without a qualified plan
- An executive who wants a portable permanent policy
- Counsel drafting the bonus and restriction agreements
Slow down when…
- No written agreement — the plan is a handshake
- Bonuses that wouldn’t pass as reasonable compensation
- A policy funded at the minimum “for the benefit,” doomed to underperform
Straight answers
Questions people actually ask
What is a Section 162 executive bonus plan?
An arrangement in which a company pays the premiums on a permanent life insurance policy owned by a key employee, treating the payment as a taxable bonus — generally deductible to the company as reasonable compensation. A double bonus also covers the employee’s tax. The executive owns the policy and its cash value; a restricted endorsement can vest that access to retain them. General information; confirm the specifics with counsel and a CPA.
How does a restricted executive bonus arrangement work?
The executive signs an endorsement agreeing not to access the policy’s cash value (loans, withdrawals, surrender) without the company’s consent until a vesting schedule is satisfied, often paired with an agreement to repay bonuses on early departure. Once vested, the policy is fully theirs. It turns a portable benefit into a retention tool.
IUL or whole life for an executive bonus plan?
IUL when the executive wants accumulation potential and the company wants premium flexibility tied to results. Whole life when guarantees matter more. Both deliver a permanent death benefit and a cash-value asset; the restriction agreement, not the product, does the retaining.
Honest, or not at all
See whether IUL actually fits your situation
Tell us a little about your goals and we'll show you the honest picture — including the guaranteed column, the real costs, and whether term or whole life does the job better. We're paid the same either way, which is why we can tell you the truth.
- We compare IUL against the simpler options first
- Illustrations explained line by line, guaranteed column first
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