An executive bonus plan is a method of compensating selected key
employees by paying the premiums of a life insurance policy on
the employee's life.
This is actually a salary reduction (defined contribution)
formulated plan.
The employer pays for a benefit that is owned by the executive.
Besides life insurance, the bonus could also take the form of
cash, automobiles, or other items of value to the executive.
With a defined contribution approach, a specified amount (the
salary reduction or employer "bonus") is periodically added to a
participant's "account," which can be either a real accumulation
of funds or simply a bookkeeping account.
Benefits to the Employer:
Can reward key executives
Selective participation is allowed (no discrimination rules)
Costs are tax-deductible
Creation of plan is simple
No administration
Amounts of coverage on various employees can differ
Plan can be terminated without IRS approval or restrictions
A restrictive endorsement can be implemented to limit immediate
access to cash values
Benefits to Executive:
Executive owns the policy1 and cash values. If he or she changes
employers, the policy is not lost.
Accumulating cash values will help in emergencies, at retirement
or for personal investments.
The death benefit may be income tax free. See IRC Sec.
101(a).Proceeds may be used for estate settlement costs.
The benefit payable at retirement or termination of service
represents the accumulation in the participant's account. This
is similar to the money purchase approach for qualified plans.
Nonqualified plans of this type are sometimes referred to as
money purchase plans.
Contributions typically are a specified percentage of the
employee's current compensation each year. However, the
contribution level can also be an amount determined as the
annual funding required to meet a "target" benefit level at
retirement.
If the employee's account is only a bookkeeping account, in
order for the employee to avoid losing the benefit of investment
earnings on the deferred compensation, the employer can
guarantee a specified minimum interest rate on the bookkeeping
account. Alternatively, the employer can make an annual
allocation to the account based on an interest formula or index
specified in the plan (usually an index beyond the employer's
control such as Moody's Bond Index). Sometimes the rate of
return that is guaranteed is tied to the value of the company's
stock.
Note: The intent of this
information provided by
termlifeamerica.com is to inform
and motivate the general public into action. One should consider
only a qualified practicing legal individual or entity, in the
state in which you reside, when making decisions on this subject
matter. | 
