Glossary

Executive bonus plan

An employer benefit in which a company pays a bonus to cover premiums on a life insurance policy the executive owns, deducting it as compensation.

Also called: Section 162 plan, Section 162 bonus plan

An executive bonus plan, often called a Section 162 plan after the tax code section that allows businesses to deduct reasonable compensation, is a simple way for an employer to provide extra life insurance and cash value to selected employees. The executive owns a permanent policy and names its beneficiaries; the company pays a bonus equal to the premium, either to the insurer or to the executive.

The bonus is deductible by the business as compensation, provided total pay is reasonable, and it is taxable income to the executive. Some employers pay a "double bonus" that also covers the tax. Hypothetical example: a company pays a $20,000 annual premium on a key manager's universal life policy. Ignoring payroll taxes, the manager in a 32% bracket owes about $6,400 in income tax on the bonus; with a double bonus, the company pays roughly $29,400 so the manager nets the full premium after tax.

Because the executive owns the policy, it goes with them if they leave. Employers wanting a retention hook may add an endorsement limiting access to the cash value for a set period, sometimes called a restricted executive bonus arrangement. Unlike qualified retirement plans, an executive bonus plan can cover only the people the employer chooses. Compare it with split-dollar designs in section 162 executive bonus plans and split-dollar life insurance.

Last reviewed October 4, 2026

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Related terms

Corporate-owned life insurance (COLI) Life insurance a business buys on its employees or executives, owns and is the beneficiary of, often to fund benefits or offset the loss of key people. Split-dollar arrangement An agreement in which two parties, often an employer and an executive, share the premiums, cash value and death benefit of a permanent life policy. Key person insurance A policy a business buys on an owner or essential employee, naming itself beneficiary, to cover losses and replacement costs if that person dies. Policy owner The person or entity that controls a life insurance contract: it names beneficiaries, pays premiums and can borrow against, assign or surrender it. Cash value The savings component that builds inside whole life, universal life and other permanent policies, which the owner can borrow against or withdraw.

Related guides

Section 162 executive bonus plans How a Section 162 executive bonus plan works: the employer pays a bonus, the executive owns the policy, and who pays the tax, plus costs and alternatives.