Bob Ritter's Blog #26: Exceptional Benefits for Outstanding Executives | Bob Ritter's Blog, ideas for financial service professionals

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Bob Ritter's Blog #26 exceptional benefits for outstanding executives life insurance executive bonus plans premium financing image

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Executive Bonus Plans are one of the most generous of non-qualified benefits. Deductible bonuses are paid by the employer to selected executives to cover the premiums on a life insurance policy with an emphasis on cash accumulation.

The life insurance is typically designed to produce significant amounts of tax free cash flow to the executive during retirement as well as protection for the family in the event of the executive’s premature death.

Standard Variations
(#1, #2, #3, #4 can all be illustrated in the InsMark Illustration System.)

Single Bonus Plan: The executive pays the income tax on the bonus. This is the lowest level of executive bonus plan, but in, say, a 30% tax bracket, the executive owns all the policy values at 30 cents on the dollar — quite a valuable fringe benefit.
Graded Bonus Plan: A single bonus gradually increases so it ends up covering both the premium and the tax on the bonus. This rewards an up-and-coming executive with a calibrated increase in bonuses.
Gross-up Bonus Plan: A bonus is large enough to cover the premium and the tax on the bonus in all years. This is top dog among the standard variations and is the most rewarding.
Controlled Bonus Plan: The executive has an obligation to repay all (or a portion of) the bonus if termination of employment occurs by a certain date or an event such as retirement. All the plans listed can include this feature. Often perceived as a better, less-complicated alternative than loan regime split dollar, this version is typically used with non-owner executives. It also provides a benefit for the employer through recovery of previously paid bonuses when an executive leaves the firm earlier than designated in the agreement establishing the plan. The death of the executive usually voids any repayment obligations. The Controlled Bonus Plan is also effective for officers and directors of publicly-owned companies where, thanks to Sarbanes-Oxley legislation, loan regime split dollar cannot currently be used.

Leveraged Variations

(#5 can be illustrated in the InsMark Leveraged Compensation System.)

(#6 can be illustrated in the InsMark Illustration System.)

(#7 can be illustrated in the InsMark Premium Financing System.)

Leveraged Bonus Plan: This is generally used with single bonus plans combined with loans from the employer to cover the executive’s tax on the bonus. This adds a recovery benefit for the employer through the loan repayment.
Self-Leveraged Bonus Plan: This combines a single bonus from the employer with loans on the policy made by the executive during premium paying years to provide the cash flow for the income tax on the bonus. This variation is very cost efficient to both the employer and the executive; however, the policy loans during premium paying years reduce the policy cash value which correspondingly reduces the tax free cash flow to the executive during retirement. This can be offset by increasing the premiums and face amount of the policy.
Note: A Self-Leveraged Bonus Plan was examined in detail in Blog #2.
Bank-Leveraged Bonus Plan: This combines a single bonus from the employer with a loan from a bank to cover the executive’s tax on the bonus. (Some life insurance companies provide the loan for the tax on the bonus, and InsMark can illustrate this feature as well.) With bank loans, the employer often uses its banking connections to facilitate the loans to the executive. Funds to repay the loans are usually borrowed from the policy. This reduces the policy cash value which reduces the executive’s tax free cash flow from policy loans during retirement. This can be offset by increasing the premiums and face amount of the policy.

Options

Unrestricted Access to Cash Values: This is generally used with sole or majority owner-executives, but can be applied to all variations.
Deferred Access to Cash Values: This involves an Endorsement of Ownership Rights agreement often used with non-owner key executives ensuring that the cash values of the policy are used as intended, typically for retirement income.

monitor and gavel image InsMark’s Documents On A Disk™ has specimen documents for all the bonus plans and options.

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