Build retirement resources beyond the business
Your business may be a major part of your financial future. An executive bonus strategy can help eligible executives build personally owned resources while providing protection for their families. It can also be part of a business’s approach to rewarding key people.
A Section 162 executive bonus arrangement pairs employer-paid compensation with a personally owned life insurance policy. With an appropriate permanent policy, cash value may develop over time and help supplement retirement income. The arrangement should fit your protection needs, budget and broader retirement goals.
How an executive bonus arrangement works
The potential business deduction
The bonus may qualify as a deductible compensation expense under Internal Revenue Code Section 162, subject to applicable requirements, including reasonable compensation for services actually rendered. The executive generally recognizes the bonus as taxable compensation; applicable payroll taxes and reporting also need review.
Your CPA should evaluate the business’s entity type, ownership and overall tax effect. In particular, pass-through owner-employees generally do not receive the same income-tax advantage as non-owner employees. This is not an automatic deduction for an owner’s personal life insurance, and a deduction alone does not establish net tax savings.
Where supplemental retirement income fits
Permanent life insurance can combine a death benefit with cash-value accumulation potential. Indexed universal life (IUL) is one possible option. Interest crediting is linked to an index under the policy’s terms; you are not investing directly in that index. Caps, participation rates, charges and funding affect results. A crediting floor does not prevent policy value from declining because of charges.
If sufficient cash value develops, withdrawals or policy loans may help supplement retirement income. These reduce policy values and death benefits, and loans accrue interest. A lapse or surrender with an outstanding loan can create taxable income. Modified endowment contracts have different distribution tax rules. This strategy is not a qualified retirement plan, and projected income is not guaranteed.
Who may want to explore it?
- Businesses looking to reward selected key employees.
- Eligible executives seeking additional retirement resources and family protection.
- Owner-employees whose entity structure and compensation warrant a CPA-led review.
- Clients with a long-term funding commitment and sufficient liquidity for other needs.
A review should compare alternatives, including existing employer retirement benefits, and consider underwriting, insurance costs, surrender charges, liquidity and the ability to maintain premiums.
A coordinated conversation with your CPA
Theodore Gerges serves business owners and professionals in Davie, Weston, Fort Lauderdale and throughout South Florida. Virtual consultations are available. Bring your CPA into the conversation so insurance design, compensation and tax considerations can be evaluated together.
The initial consultation is complimentary. We’ll start with your goals, business structure and existing resources to determine whether further review makes sense.
Frequently asked questions
Is this a qualified retirement plan?
No. An executive bonus arrangement uses current taxable compensation to fund personally owned life insurance. It can be considered alongside a 401(k) or other retirement resources, but has different costs, tax rules and risks.
Can the business deduct the bonus?
Potentially. The bonus may qualify as a compensation deduction under Section 162 when applicable requirements are met, including reasonable compensation for services actually provided. The recipient generally reports the bonus as taxable compensation. Your CPA should assess the full tax effect.
Can a business owner participate?
Potentially, depending on the business entity, employment status and ownership. Owner-employees of pass-through businesses generally do not receive the same income-tax advantage a non-owner employee may receive. A deduction alone does not establish net tax savings.
Does the strategy require indexed universal life?
No. Different permanent life insurance policies may be considered. Indexed universal life is one option; its crediting terms, costs, guarantees and funding assumptions should be compared with alternatives.
How could cash value support retirement income?
If sufficient cash value develops, policy withdrawals or loans may provide supplemental resources. Access reduces available policy values and death benefits; loan interest, policy lapse and tax consequences must be reviewed. Illustrated retirement income is not guaranteed.
Can you work with my CPA?
Yes. Theodore can discuss insurance design and planning goals while your CPA evaluates entity-specific tax treatment, compensation and reporting. Legal counsel can review agreements when appropriate.
Educational references: IRC Section 162; executive bonus overview; insurance-based supplemental income considerations.