Business owners are always looking for ways to recruit, reward and keep key people. A Section 162 executive bonus plan is one of the simplest: the business pays for a life insurance policy the executive owns, and deducts the cost as compensation. There are no discrimination rules and no IRS approval required.
Key takeaways
- The employer can choose who participates and generally deducts the bonus as compensation.
- The executive owns the policy, reports the bonus as income, and keeps the cash value and death benefit.
- A double bonus can cover the executive’s income tax so the benefit costs them nothing out of pocket.
The employer picks who to reward, deducts the cost, and the executive owns a portable policy with cash value.
How the plan works for the employer
- Pays the agreed life insurance premium as a bonus
- Has no ownership rights in the executive’s policy
- Reports the bonus on the employee’s W-2
- Generally deducts the bonus as reasonable compensation and an ordinary business expense
How the plan works for the executive
- Is the applicant, owner and insured on the policy
- Names their own beneficiary
- Pays ordinary income tax on the bonus, unless the employer also pays a tax bonus
- Benefits from cash value accumulation and the death benefit for personal needs
Because the executive owns the policy, it’s fully portable if they leave. They can keep funding it personally.
Single vs. double bonus
With a single bonus, the executive pays tax on the premium amount. With a double bonus, the employer also pays a cash bonus to cover that tax, so the executive’s after-tax cost is zero. Our article on single vs. double bonus walks through the math.
When to consider a restricted plan
A basic 162 plan rewards key people but doesn’t tie them to the company. Employers who want “golden handcuffs” can use a restrictive endorsement or vesting schedule that limits the executive’s access to cash value until they meet service requirements. Plans can also be designed with long-term care or chronic illness benefits.
Contact our Life Sales team to design an executive bonus plan for your business owner clients.
Frequently asked questions
Is an executive bonus plan tax deductible?
Generally yes. The employer deducts the bonus as compensation, provided total compensation is reasonable. The executive reports the bonus as taxable income.
Does an executive bonus plan have to include all employees?
No. It is not a qualified plan, so the employer can select which employees participate and how much each receives.
What happens if the executive leaves the company?
The executive owns the policy and keeps it. Unless a restrictive endorsement or vesting arrangement applies, they can continue paying premiums personally.
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 →We’re Here to Help
Have a question about what you just read, or a case you’re working on? Tell us a bit about what you need, and a member of the SRS team will follow up with you personally — no obligation, no hassle.
