Section 162 executive bonus plans are usually pitched for key employees, but they can work well for S-corporation owners themselves. The plan is simple to set up and administer, and it can be designed to meet several needs at once. Here is how to position it for an owner-employee.
Key takeaways
- An S-corp owner who is also an employee can receive a deductible bonus used to pay premiums on a policy they own.
- Plan design can match the need: term for income replacement, overfunded permanent coverage for supplemental retirement, or both.
- Riders for long-term care and waiver of premium can extend the plan beyond a pure death benefit.
A bonus is a bonus: the plan can fund whatever coverage the owner actually needs, from term to permanent to LTC.
How a 162 bonus works for an S-corp owner
In a 162 plan, the business pays a bonus to the employee, who uses it to pay premiums on a life insurance policy they personally own. The bonus is generally deductible to the business as compensation and taxable income to the employee. An S-corp owner who draws a salary as an employee can participate, which lets the owner pay for personal coverage with business dollars.
Because there is no formal plan document requirement like a qualified plan, it is easy to implement and administer. Have the client’s tax advisor confirm how compensation and payroll tax apply to their situation, especially for greater-than-2% shareholders.
Match the policy to the purpose
Not every need lasts a lifetime. If the goal is replacing income before retirement, term insurance may be the most economical choice, and there is no reason a 162 plan cannot fund term. If the need is permanent, such as estate liquidity, the policy has to be built to last.
Sometimes two policies work better than one: a term policy for income replacement plus a permanent policy for lifelong needs. At retirement the term can lapse or be converted if the need has grown.
A supplemental retirement resource
Highly compensated owners often face limits on qualified plan contributions. An overfunded permanent policy can build cash value that may be accessed on a tax-advantaged basis through withdrawals and loans to supplement retirement income. The owner can choose a lean or heavy funding design based on goals and cash flow.
If the plan uses indexed UL, see our post on using indexed UL to fund executive bonus plans.
Add long-term care and disability protection
- LTC or chronic illness rider. Allows early access to the death benefit if care is needed. If the policy is also meant to supplement retirement, LTC withdrawals can undercut that goal, so consider one overfunded policy for retirement and a second with an LTC rider.
- Waiver of premium. Often overlooked, it keeps the policy in force if the owner becomes disabled and can no longer work.
- Other vehicles. If more life coverage is not needed, the bonus can fund an annuity or standalone LTC policy instead.
Frequently asked questions
Can an S-corp owner participate in a 162 executive bonus plan?
Generally yes, if the owner is also a W-2 employee of the S corporation. The bonus is typically deductible to the business and taxable to the owner. Confirm the details with the client’s tax advisor.
Should a 162 bonus plan fund term or permanent life insurance?
It depends on the need. Term fits income replacement before retirement; permanent fits lifelong needs or supplemental retirement income. Some owners use both.
Can a 162 bonus plan include long-term care coverage?
Yes. The policy can carry an LTC or chronic illness rider, or the bonus can fund a standalone LTC policy.
Reviewed by Tim Fuller on 2026-09-26
Tim Fuller
President, SRS Inc.
Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.
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