Life insurance: A workhorse for funding executive benefits

By Higginbotham on August 03 , 2016

Executive benefits - life insurance

Running a successful business takes a successful team, and that starts with your executive staff. They’re the driving force behind your operation, so you want the best professionals you can find. But competition for executive “superstars” is keen, to say the least. So how do you put together and fund an attractive compensation package that goes above and beyond the usual offerings, but doesn’t kill your bottom line?

Think life insurance.

It’s one of the most versatile tools available for funding an executive benefits plan. Here are just a few of your options.

Executive Bonus Plan (Section 162 Plan)

In this arrangement, the employer takes out a life insurance policy on a key employee. It can be either a term policy that’s only in effect for a specific period of time and doesn’t build cash value, or a whole life or universal policy that accrues value over time. The key employee owns the policy and the cash value, and can choose a beneficiary to receive the benefit at his or her death. The employee can use the cash value for retirement and the protection for his or her family.

Executive bonus plans can be a win-win in several ways:

  • For the employer, the salary or bonus used to pay the premiums is tax deductible; there are no annual reporting or disclosure rules and no annual administrative costs; and they’re free to select which employees receive the benefit.
  • For employees, they get life insurance coverage at little or no cost, the accumulated cash values can be used for retirement income or any other use and the plan is portable and goes with them if they change jobs.

Split-dollar arrangements

In a split-dollar arrangement, an employer and employee agree to share the premium, death benefit and cash value of a permanent life policy. For the employee, sharing the premium payment can make it easier to get coverage. For the employer, this arrangement can provide cost recovery and act as “golden handcuffs,” requiring the employee to repay the business for the amount of premiums advanced.

Key person

Got a key revenue producer on your team that is so vital to your operation that losing him or her would cause a financial crisis? Consider key person insurance. It’s essentially life insurance on your key employee(s), with your business as the beneficiary. If the key employee suddenly dies, your company gets the insurance payout. And there’s another bonus: you can use this coverage as an incentive to retain key executives by offering part of the proceeds to their family in case of their death.

While a life insurance policy isn’t the only way to fund executive benefits, it’s one of the smartest. It’s a flexible tool that can give you the leverage you need to attract, retain and reward the key executives that are so vital to your operation.

Contact us and we’ll help you choose the solution that works best for your team and your budget.


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