Executive bonus plans are simple, which is why employers like them. Their weakness is that once the premium is paid, the money is gone, even if the executive walks out the door next year. A loan-regime split dollar design can keep the simplicity of a bonus plan while giving the employer a way to recover its outlay.

The problem with a plain executive bonus plan

Of the common nonqualified benefit arrangements that involve life insurance (deferred compensation, split dollar and executive bonus), the executive bonus plan is usually the easiest. The executive owns the policy, the employer pays the premium, and the payment is reported each year as taxable compensation to the executive and is generally deductible to the employer.

The catch is control. Once the bonus is paid, the employer has no claim on the policy. If the executive leaves early, the company has funded a benefit for someone who is no longer building its business. Many employers want some or all of their cost back in that situation.

How the cost-recovery design works

The fix is to combine the bonus concept with a loan-regime split dollar agreement:

1. Premiums are treated as loans. The employer pays premiums on the executive-owned policy, and each payment is documented as a loan to the executive.
2. The employer is secured. A collateral assignment of the policy protects the employer’s right to recover its money if the executive leaves before the agreed schedule is complete.
3. The executive reports imputed interest. Each year the executive recognizes income for the below-market interest on the loan, generally measured using the applicable federal rate (AFR). The employer can choose to bonus enough to cover that extra tax cost.
4. The loan is forgiven over time. On a vesting-like schedule set out in the agreement, portions of the loan are forgiven. Each forgiven amount is reported as income to the executive and is generally deductible by the employer, just as a bonus would be.

What happens as the plan matures

As the loan balance drops, so does the imputed interest the executive has to recognize. When the loan is fully forgiven, the collateral assignment is released and the executive owns the policy free and clear. At that point the arrangement looks exactly like a traditional executive bonus plan.

If the executive leaves early, the employer can recover the outstanding loan balance from the policy under the terms of the collateral assignment. That is the “golden handcuff” many business owners are looking for. For a related design aimed at family wealth transfer, see our overview of generational split dollar.

Is it right for your client?

This approach takes more paperwork than a plain bonus plan, and the executive carries a modest extra tax cost for the imputed interest. It tends to fit employers who:

• Want to reward and retain a key executive with permanent life insurance
• Are uncomfortable giving up all control of premium dollars on day one
• Prefer a clear, written schedule that shows the executive exactly when the benefit becomes theirs

The agreement, the loan documentation and the tax reporting should be prepared with the client’s legal and tax advisors. Contact us with your next executive benefit case and our team will help you design a plan that protects the employer without a lot of fuss.

Frequently asked questions

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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The beneficiary designation is one of the most important parts of a life insurance application, and one of the easiest to get wrong. When minor children could end up receiving the death benefit, a few extra minutes of planning can save the family a costly court process.

Why the beneficiary box is a trap

The beneficiary space on most applications is small. That encourages clients to keep their instructions short and tempts busy advisors to skip a fuller designation on a separate page. When children are involved, a short designation can create big problems.

Minors are not legally able to accept death proceeds. The age of majority varies by state. If a minor becomes the beneficiary, directly or as a contingent beneficiary, a guardian of the child’s property may need to be appointed through the courts, a process that takes time and money and may not put the person the insured would have chosen in charge.

Option 1: Name a trust

The strongest solution is to name a trust as beneficiary. The trustee holds and manages the proceeds for the children and distributes them according to the insured’s written instructions, whether that is paying for education, making staged distributions at certain ages, or holding funds longer for a child who needs more time.

The hurdle is getting the client to have a trust drafted, even when the size of the death benefit clearly justifies the cost. If the family has larger estate planning goals, an irrevocable or grantor trust may be worth discussing with their attorney.

Option 2: A UTMA custodianship designation

Nearly every state has adopted a version of the Uniform Transfers to Minors Act. It lets a beneficiary designation name a custodian to receive proceeds for the benefit of a minor, with no separate trust document required. Think of it as a basic trust created by state law.

There are trade-offs compared with a trust:

• The custodian’s duties are set by statute, which may be less flexible than the insured would like.
• The child receives the remaining funds at the age set by state law, often 18 or 21, which may be younger than the parents would prefer.

Not perfect, but far better than leaving the proceeds to a court-supervised guardianship.

Getting the wording right

UTMA designations can be tricky. Despite the word “uniform,” states differ in what they require, and carriers differ in the wording they will accept. Good practice includes:

• A separate, complete designation for each minor child
• Naming successor custodians in case the first choice cannot serve
• Using a separate sheet rather than squeezing instructions into the application box
• Confirming the carrier’s preferred language before submitting

Contact us for help drafting any ownership or beneficiary designation, especially one that creates a custodianship for a minor.

Frequently asked questions

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.

Connect on LinkedIn →