A Section 162 executive bonus plan is simple: the employer pays the premium on a policy the executive owns. Funded with indexed universal life and designed thoughtfully, that simple chassis becomes one of the most attractive nonqualified benefits a business can offer.
Key takeaways
- IUL gives the executive tax-deferred growth linked to an index, with downside protection, plus the potential for tax-free retirement income.
- Design choices — bonus grossed up for taxes, paid-up funding by retirement, an LTC rider — make the plan feel like a lifetime benefit.
- A two-policy approach (term for working-years need, smaller IUL for life) can keep costs manageable.
A well-designed executive bonus plan doesn’t just sell more easily — it stays valuable to the executive long after retirement.
Why indexed UL fits executive bonus plans
In an executive bonus plan, the executive owns the policy and the employer deducts the bonus as compensation. Because the executive keeps the policy, the product choice matters. Indexed UL credits interest based on an index, with a floor that protects against market losses, and its cash value can later be accessed through withdrawals and loans for supplemental retirement income. That accumulation potential is what turns the plan from “some life insurance” into a meaningful benefit. For the tax comparison, see overfunded UL vs. a Roth IRA.
Design features that add value
- Eliminate sticker shock. The bonus is taxable income to the executive. Gross it up so the after-tax amount covers the premium and the remainder can cover the tax.
- Skip cost recovery when possible. Reimbursement provisions reduce the plan’s appeal. If recovery is essential, split dollar may be a better fit; otherwise, the employer can start with lower premiums and increase the bonus as service lengthens.
- Fund to paid-up status. A policy that needs premiums after retirement feels like a future burden. Aim for a design that can carry itself into the executive’s non-working years.
- Add a long-term care rider. Tax-free accelerated benefits for care give the executive protection for life.
The two-policy solution
A paid-up IUL with an LTC rider can be expensive. Since death benefit needs are highest during working years, one approach is to cover the bulk of that need with level term through the expected working life, then add a smaller IUL. The IUL’s death benefit can help with long-term care costs if needed, or provide estate liquidity if not.
Setting expectations
Illustrations for IUL are not guarantees. Caps, participation rates and policy charges can change, and loans reduce the death benefit. Show the executive conservative illustrated rates and explain that the policy needs monitoring. Our advanced markets team can help you compare carriers and design options. See also single vs. double bonus designs.
Frequently asked questions
Is the executive taxed on an executive bonus plan?
Yes. The bonus is reported as W-2 income to the executive and is generally deductible by the employer as reasonable compensation. Many plans gross up the bonus to cover the tax.
Why use indexed UL instead of term in a bonus plan?
IUL builds cash value that can supplement retirement income and can carry a long-term care rider, making the benefit valuable for life. Term provides protection only during the coverage period.
Can the employer get its money back if the executive leaves?
Not under a pure executive bonus plan, since the executive owns the policy. A restrictive endorsement or a split dollar arrangement can add recovery or vesting features if needed.
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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