Amid rising wages, the Great Resignation, ongoing labor shortages and robust employment growth, Americans are actively on the job hunt. From entry-level employees in bridge jobs to executives in decision-making roles who’ve exhausted their promotion options, professionals of all abilities and circumstances recognize it’s a job seeker’s market. They’re taking advantage of it by keeping their options – and their eyes – wide open. This means that for business owners with highly valuable talent whose expertise makes them irreplaceable, the current employment environment can present an existential threat to their future should all-star staff accept a job elsewhere.
An executive bonus life insurance plan can serve as an effective recruitment and retention resource. But what is executive bonus life insurance? Who owns the policy in an executive bonus life insurance plan? How does an executive bonus arrangement work? Is an executive bonus plan taxable?
We’ll address all these questions and more here, along with why Leveraged Planning® through Global Financial Distributors is the option more organizations and financial advisors trust to turn this effective retention and recruitment strategy option into a reality.
What is executive bonus life insurance?
Executive bonus life insurance, which is also referred to as 162 executive bonus plans, is a type of group life insurance product offered to individuals in C-suite positions, such as chief executives, operations executives or chief financial officers. With one in place, executive bonus life insurance enables a business to provide life insurance to a given key employee or high performance employees in a tax-advantaged way. Generally, this means that a business can pay for the premiums of executive bonus life insurance with money that is fully tax-deductible(as long as the bonus is considered reasonable compensation), all while the plan itself is owned by the executive. Since the key employee is the one who owns the policy, they can decide for themselves who to name as their beneficiaries for the death benefit. They may also be able to access the policy’s cash value on a tax-favored basis.
How does an executive bonus plan work?
A Section 162 bonus plan is highly customizable so it can be structured in many different ways. Here’s a general overview of how it is implemented:
1. Employer takes out a permanent or universal life insurance policy on a key executive or employee.
2. Employer pays a tax-deductible bonus to fund the premiums on the policy or gives the funds to the employee to make the payment.
3. Key employee becomes owner of the life insurance and determines who will be the beneficiaries of the death benefit.
4. Upon retirement, the employee can leverage the policy cash value to address personal needs. The beneficiary may also be able to utilize the policy’s surrender cash value.
How can executive bonus life insurance benefit your business?
One of the primary advantages of executive bonus life insurance is its effectiveness as a retention tool. By offering bonus life insurance, it may forestall your talent from contemplating a job switch. Many people right now aren’t just thinking about another job; they’re accepting the offers when they’re tendered. Part of the reason why has to do with what these positions pay in salary relative to their current or previous employer. In other words, rival employers are trying harder to recruit them than their present employers are to retain. For example, in June of 2022, people who wound up accepting a new job during the month earned 6.4% more compared to their old role, The Wall Street Journal reported from Federal Reserve Bank of Atlanta data. That’s the largest pay differential for people changing jobs in 20 years.
Youngseok Shin, a professor of economics at Washington University in St. Louis, told the news publication that with the average dollar buying less these days as a result of inflation, there’s a greater incentive for people to seek greener pastures.
“I think the workers are paying a lot more attention,” Shin explained. “They are comparing their wage growth with the headline inflation numbers.”
Through 2022 so far, an estimated 47 million Americans are now working for a different employer than they did when the year began, the Journal reported from Bureau of Labor Statistics data. Many people warned last year they would quit if they didn’t receive some kind of pay raise or bonus. In a survey conducted by Robert Half in June of 2021, close to one-third of respondents indicated they would seriously consider a new job if they weren’t supplied with reasonable compensation. The rate was even higher among working parents (36%).
In a roundabout way, executive bonus life insurance serves as a raise since it offers policy cash value that can be used at any time and the business covers the cost of the premiums through bonus pay.
Incentivizes hard work
The keyword when it comes to an executive bonus plan is “bonus.” This means that you’re not offering life insurance as a benefit simply for their being employed with your business. You’re making it available to those who’ve earned it based on their performance. This means you can decide which executive is worthy of such a plan in accordance with their body of work and contribution to the company’s growth.
Offers flexibility
In addition to bonus life insurance being contingent upon performance, you can also make its availability dependent on an employee remaining with your organization. This is made possible through a restricted executive bonus arrangement. With a restricted executive bonus arrangement, the employee has limited access to the cash value of the policy for a specific amount of time, be it months or years. Additionally, the key executive must reimburse the policy cash value if they wind up leaving the company during that time interval.
Beneficiaries don’t have to pay income tax on death benefits. The tax advantages of an executive bonus plan aren’t relegated solely to your business; they also trickle down to whomever your employee makes the beneficiary of the life insurance policy. Depending upon how the policy is structured, the beneficiary may not need to pay the income tax on the death benefit proceeds of the life insurance policy.
Executive bonus plans can be a reliable retention and recruitment resource, but you may not have adequate funds to move forward. But where there’s a will, there’s a way. If you have the will, Leveraged Planning® serves as the way. From key person policy funding to business continuity to bonus life insurance, Leveraged Planning® from Global Financial Distributors provides your business with the necessary funds it needs to execute an executive bonus plan. If you’re a business owner or financial professional who advises one, contact us today to learn more.
