Executive Bonus 162 Plans
Jason Stolz CLTC, CRPC
Executive Bonus 162 Plans are one of the simplest ways for a business to reward and retain key employees using life insurance. The concept is straightforward: the company pays a bonus to the executive, the executive uses that compensation to fund a personally owned life insurance policy (often permanent insurance such as whole life or universal life), and the business generally deducts the bonus as a compensation expense. The executive owns the policy, controls the beneficiary designation, and can potentially access policy cash value over time, while the employer avoids the long-term liabilities and complex administration that often come with other nonqualified benefit arrangements.
At Diversified Insurance Brokers, we help business owners and executives design ethical, efficient 162 bonus plans that match the real goal of the arrangement: retention, recruitment, and long-term planning. The “best” design is not the same for every company. Some employers want a clean benefit with minimal administration. Others want a retention-focused structure that encourages the executive to stay through a defined period. Some want a plan that complements an existing benefit stack such as nonqualified deferred compensation or split-dollar arrangements. In each case, the key is to align plan mechanics, policy design, and documentation so the plan does what you intend without creating surprises later.
Because life insurance is the funding vehicle, a properly structured 162 plan can also become a personal planning asset for the executive. The death benefit may provide family protection, and permanent policies can accumulate cash value over time. That is one reason these plans remain popular: the benefit is tangible, understandable, and portable. If you want a broader perspective on how policy structure impacts performance and flexibility, reviewing review my life insurance policy can be helpful, especially for executives who already own permanent coverage and want to compare whether a new policy or a restructure is more appropriate.
How a 162 Executive Bonus Plan Works
A 162 bonus plan works by treating the life insurance funding as compensation rather than a company-owned benefit. The employer pays a bonus directly to the executive (or reimburses the executive for premiums), and that bonus is reported as taxable income on the executive’s W-2 (or 1099, if applicable). The executive then pays premiums into a life insurance policy they personally own. In many cases, the employer and executive sign a written bonus agreement that outlines the funding amount, the intended purpose, and any conditions tied to the arrangement.
From the business side, the attraction is simplicity. The company is not typically the policy owner, does not have to manage a trust or a complex split-dollar accounting structure, and does not maintain a long-term plan liability like many deferred compensation programs. The company is generally paying compensation, and compensation is generally deductible (subject to normal compensation rules). From the executive’s side, the attraction is ownership and control. The executive is not waiting for vesting credits in an employer-controlled account. They own the policy and can coordinate it with their family protection and estate planning objectives.
In practice, the effectiveness of the plan depends on policy selection and how the bonus is sized. If the goal is long-term accumulation and flexibility, permanent life insurance is typically used because it can build cash value. Term insurance is rarely used for 162 plans because it does not accumulate cash value and can undermine the long-term retention and planning purpose of the arrangement. If the executive’s primary objective is pure death benefit protection for a period of time, that might be solved more efficiently with traditional term coverage instead of a 162 plan, and that is something we evaluate during plan design.
Executives sometimes ask whether a 162 plan can be paired with business protection planning. It often can, but it depends on who the policy is intended to protect and who should own it. If the business is trying to protect itself from the loss of a key executive, the employer is more commonly the owner and beneficiary under a traditional key person structure. That is a different arrangement than a 162 plan where the executive owns the policy. That is why many companies use both approaches side-by-side: a company-owned key person policy to protect the business, and a 162 plan to reward the executive. If you are looking at the key person side of the equation, it may help to also review key person life insurance for executives.
Why Use an Executive Bonus Plan?
Executive bonus plans are popular because they solve a real problem: how do you create a meaningful benefit for a key person without building a complicated administrative system or creating a long-term balance sheet obligation? A 162 plan can be implemented quickly, explained clearly, and scaled for multiple executives. The business can establish a consistent benefit philosophy (such as funding a policy for senior leaders) without having to create an entirely separate retirement plan framework.
For the executive, the value is easy to understand. They receive additional compensation that funds an asset they own. Over time, a well-structured permanent policy can accumulate value that may be accessed later via loans or withdrawals (subject to policy rules). That can support supplemental retirement cash flow, help fund future opportunities, or serve as a planning buffer. The death benefit also supports family protection and estate objectives, which many executives prioritize once they reach a stage where income replacement, legacy planning, and efficient wealth transfer become central goals.
For the employer, there are three common motivations. The first is retention and recruitment. Offering a benefit that executives can see and understand can differentiate the company in competitive hiring environments. The second is simplicity. Compared to certain nonqualified deferred compensation programs, the employer’s ongoing administrative burden is often lighter. The third is cost control. The company chooses the bonus level and can structure the funding schedule based on budgets and compensation philosophy. Many business owners appreciate that it is a defined annual cost rather than an open-ended future obligation.
Because 162 plans are frequently used in a broader executive benefits stack, we often review how a 162 plan might interact with other tools the business is already using. Depending on your goals, other benefits might include split-dollar arrangements, deferred compensation plans, equity incentives, or business continuation planning. If you want to see how a different executive benefit design works, you may also explore split dollar insurance overview as a comparison point, since split-dollar and 162 plans can look similar on the surface but operate very differently in ownership, control, and tax treatment.
Design Choices and Considerations
A 162 plan is simple in concept, but the “design” matters. The plan is only as effective as the policy performance, the documentation, and the retention mechanics. At Diversified Insurance Brokers, we focus on four categories of design decisions: policy selection, bonus sizing and tax gross-up, retention strategy, and coordination with other planning elements.
Policy type and funding approach should match the executive’s timeline and the employer’s intent. Permanent policies are usually selected because they can build cash value and last beyond the executive’s working years. Within permanent insurance, there are meaningful differences in guarantees, expenses, flexibility, and performance assumptions. For example, whole life typically emphasizes guarantees and structured cash value growth, while universal life can emphasize flexibility. Indexed universal life introduces index-linked crediting mechanics and can be attractive for certain accumulation goals, but it must be evaluated carefully for costs, caps, and assumptions. Our job is to evaluate the trade-offs and select a policy design aligned with the plan’s purpose, not a generic “one-size-fits-all” product choice.
Bonus sizing and gross-up is where many plans either become attractive or create frustration. The executive bonus is taxable compensation. That means if the employer pays a bonus equal to the premium, the executive may not have enough net after taxes to fund the premium as planned. To solve that, many employers add a “gross-up” amount so the executive receives enough to pay taxes and still cover premiums. The gross-up can be structured in different ways depending on how the company wants to handle tax withholding and whether the company wants the executive to be fully net-neutral. The gross-up is not required, but it is often used when the company wants the benefit to feel clean and consistent to the executive.
Retention mechanics are also a key design variable. In a standard 162 plan, the executive owns the policy immediately. That means the employer cannot “forfeit” the policy if the executive leaves. However, employers can still encourage retention by using different strategies. Some companies create a schedule where the 162 bonuses continue over multiple years, which naturally encourages the executive to stay to receive ongoing benefits. Some incorporate a written agreement that creates repayment obligations under certain conditions. Others coordinate the 162 plan with separate retention incentives. The point is not to create complexity for its own sake, but to align the benefit with the company’s retention timeline and culture.
Coordination with other benefits matters more than many companies expect. If an executive already has substantial company-sponsored benefits, adding a 162 plan can interact with compensation limits, benefit plan strategies, or broader financial planning objectives. If the executive already owns significant permanent life insurance, it can be more efficient to review whether an existing policy can be optimized rather than starting from scratch. That is why we often begin with a policy and benefit audit, including the executive’s current coverage and any employer-owned policies, before recommending a final design.
When business planning intersects with personal planning, it is also important to ensure the policy’s beneficiary designations and ownership align with estate and business objectives. In some cases, executives may integrate personally owned life insurance with broader estate planning tools such as trusts. If that is part of your planning path, it can be useful to explore topics like irrevocable trust planning and how ownership decisions affect outcomes. The 162 plan itself is not a trust, but it can be used in strategies where the executive later transfers the policy (subject to tax and legal considerations) if estate planning calls for it.
Sample Scenario: Retention Built with a 162 Bonus
Consider a company that wants to reward and retain a key executive over a five-year period. The company implements a 162 bonus agreement where it pays a defined annual bonus intended to fund a permanent life insurance policy. To keep the executive from feeling “tax pain,” the company adds a gross-up so the executive receives enough to cover taxes and still pay premiums. Each year, the executive funds the policy. Over time, the policy builds cash value and provides a meaningful death benefit for the executive’s family.
From the employer’s perspective, the plan is predictable. The company knows exactly what it intends to pay each year, treats it as compensation expense, and does not carry a long-term liability on the balance sheet. From the executive’s perspective, the benefit is concrete. They can see policy values, know they own the contract, and recognize that staying with the company results in continued annual benefits. If the company wants additional retention pressure, the plan can be coordinated with other incentives or written agreements that outline what happens if the executive leaves during an agreed retention period.
The most important point in any scenario is that the company and executive must understand the difference between ownership and retention. A 162 plan usually provides immediate ownership. Retention is created by the funding schedule, the overall executive compensation package, and the business relationship—not by the employer holding the policy hostage. That is why we focus heavily on realistic “exit mechanics” and clear documentation so the plan does not create misunderstandings later.
Tax and Documentation Considerations
At a high level, the taxation of a 162 plan is simple: the bonus is taxable to the employee and deductible to the employer, generally like any other compensation. However, the details matter. The company must document the bonus, handle payroll withholding appropriately, and maintain records showing that the payment is compensation. The executive should also keep records related to policy ownership and premium payments. Proper documentation helps avoid confusion and supports clean administration.
From the executive’s side, life insurance can provide favorable tax characteristics when structured and managed correctly. The death benefit is generally paid income-tax-free to beneficiaries under current rules. Cash value growth inside a permanent life policy is typically tax-deferred, and certain access methods may provide tax advantages when executed properly and within policy rules. That said, the tax results depend on correct policy design and correct handling of loans and withdrawals, and the executive should coordinate with their tax professional for their specific circumstances.
One topic we address early is how the company wants the plan to be perceived and governed. Some companies prefer a formal written bonus agreement to ensure the intent is documented. Others want the plan to be as “simple compensation” as possible. The right answer depends on the company’s culture, governance practices, and retention objectives. Our role is to provide the structure and the paperwork options so the company can implement an approach that is both compliant and aligned with its intent.
If the company is also implementing other business protection plans—such as policies tied to buy-sell agreements, business loan protection, or indemnity obligations—those should be coordinated. For example, if the business has key debt obligations, it may also consider tools like business loan life insurance as a separate, company-owned planning element. That type of policy is not the same as a 162 plan, but many companies implement both because they solve different problems.
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Pros and Cons of 162 Executive Bonus Plans
The main advantage of a 162 executive bonus plan is clarity. The employer pays compensation and receives a compensation deduction, and the executive owns the policy. There are fewer moving pieces compared to arrangements that involve shared ownership, complex benefit accounting, or long-term plan liabilities. Many business owners appreciate that 162 plans can be administered with normal payroll processes and do not require building an entirely new benefits infrastructure.
Another advantage is executive ownership and flexibility. Because the executive owns the policy, they can coordinate beneficiaries, integrate the policy into a broader personal financial plan, and potentially access cash value under the policy rules. This is often viewed as more attractive than plans where the executive must wait for vesting or where benefits remain subject to employer control.
The main trade-off is that the bonus is taxable income to the executive. That can be resolved in part by a gross-up, but gross-up increases the cost to the employer. Another trade-off is that because the executive owns the policy, the employer’s leverage is limited if the relationship ends. This is not necessarily a negative, but it must be understood from the start so the company does not assume it has control it does not actually have. Finally, the plan must be paired with a policy structure that makes sense for long-term performance. A poorly designed policy can undercut the plan’s perceived value even if the bonus arrangement itself is sound.
Comparing 162 Plans with Other Executive Benefits
A 162 plan is often compared to split-dollar insurance, deferred compensation plans, and equity-based incentives. The key difference is ownership and control. With a 162 plan, the executive owns the policy outright. In a split-dollar arrangement, ownership and benefits can be shared or controlled through collateral assignment structures, which can provide the employer more direct retention leverage but also introduces more complexity. If you want a direct comparison point, split dollar insurance overview is a good place to start because it outlines how split-dollar mechanics differ from a bonus-based approach.
Compared to nonqualified deferred compensation, 162 plans often feel more tangible to executives because they involve a real policy they can see and own. Deferred compensation can be powerful, but it typically creates an employer liability and involves additional plan governance considerations. Some companies use both: a 162 plan for an immediate, visible benefit and a deferred compensation plan for long-term retention and retirement incentives. The right combination depends on business objectives, executive expectations, and company cash flow.
Compared to equity incentives, a 162 plan is generally less tied to company valuation and market conditions. That can be attractive when a company wants a benefit that remains consistent regardless of equity performance. In many cases, 162 plans are implemented to provide stability in the benefits package while equity incentives provide upside potential. This balance can be especially appealing to executives who value predictable long-term planning tools.
Common Pitfalls and How We Help You Avoid Them
Most 162 plans fail to deliver on expectations for one of a few reasons. The first is unclear intent. If the employer and executive have different assumptions about how the plan works—especially around retention and exit mechanics—the arrangement can create frustration. We solve this by defining the objective clearly at the start and putting the right agreement structure in place.
The second is poor policy fit. If the policy is not designed for the plan’s objective, it can underperform or create liquidity limitations that surprise the executive later. We solve this by matching policy type, premium design, and rider structure to the executive’s actual needs and by comparing multiple carrier options so the design reflects the best available fit.
The third is tax and payroll handling errors. Because the bonus is compensation, it must be handled correctly through payroll, and gross-up must be calculated realistically. We coordinate the implementation details so the plan is administered cleanly and predictably.
Finally, some companies implement a 162 plan without coordinating other business insurance needs. That can lead to redundant coverage or missed opportunities. For example, if the business has contractual obligations, it may need separate coverage tools such as contract indemnity life insurance, which is a different planning solution than a 162 plan but often relevant in executive and business contexts.
Why Work with Diversified Insurance Brokers
Diversified Insurance Brokers is a family-owned, fiduciary insurance agency licensed in all 50 states, and we help business owners and executives implement benefit strategies that are practical, compliant, and aligned with long-term goals. Our job is not to push a generic template. Our job is to model the actual economics of the benefit, match it to the right policy design, and coordinate documentation so the plan works the way you expect.
We also understand that executive benefit decisions often affect multiple stakeholders. The employer wants retention, cost control, and clean administration. The executive wants ownership, planning value, and clarity. Advisors and CPAs want documentation that makes sense. We bring those perspectives together so the plan can be implemented without confusion and maintained over time with minimal friction.
If you already have an existing policy or executive benefit program, we can review it first and show you where the plan is strong, where it can be improved, and whether a 162 plan is the right complement. Many companies and executives benefit from a structured review process before committing to a new design. If you want that analysis, use the request form above and we’ll start by clarifying objectives and gathering the minimum details needed to model a realistic plan.
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FAQs: Executive Bonus 162 Plans
What is a 162 executive bonus plan?
A 162 executive bonus plan is an arrangement where a business pays a bonus to a key employee, and the employee uses that compensation to fund a personally owned life insurance policy. The company generally treats the bonus as deductible compensation, while the employee reports it as taxable income.
Who owns the policy in a 162 plan?
The executive typically owns the policy. That ownership includes control of beneficiaries and access to policy values under the contract rules. Employers that want more control often consider alternatives such as split-dollar arrangements.
Is the executive bonus taxable to the employee?
Yes. The bonus is generally ordinary income to the employee and is subject to normal payroll withholding. Many employers choose to gross-up the bonus so the executive has enough net dollars to fund the premium.
What is a “gross-up” and when is it used?
A gross-up is an additional bonus amount paid to help offset the taxes due on the bonus itself. It is commonly used when the employer wants the executive to be effectively net-neutral while still receiving a policy funded at a targeted premium level.
Can the executive access the policy cash value?
In many permanent life insurance policies, cash value may accumulate over time and can be accessed through policy loans or withdrawals, subject to the policy’s rules and limitations. Access methods and outcomes depend on the contract design and how it is managed.
What types of life insurance are typically used?
Most 162 plans use permanent life insurance such as whole life or universal life because the objective is often long-term value and retention. Term insurance is less common because it does not build cash value and may not align with long-term plan goals.
What happens if the executive leaves the company?
Because the executive typically owns the policy, the policy usually remains with the executive. Employers that want retention leverage often use multi-year bonus schedules, written agreements, or coordinated benefits to encourage a longer stay.
Can the employer be named as beneficiary?
It can be possible, but beneficiary designations should match the plan’s purpose and be coordinated carefully. If the goal is business protection, a separate employer-owned key person policy is often cleaner than using a personally owned executive bonus policy.
How is a 162 plan different from split-dollar?
A 162 plan typically uses employee-owned life insurance funded by taxable bonuses. Split-dollar arrangements often involve shared benefits and employer control through ownership or collateral assignment structures, which can increase retention leverage but also adds complexity.
What information is needed to design a plan?
We typically start with the company’s retention goals, the number of executives involved, target benefit levels, and whether gross-up is desired. On the executive side, we evaluate age, general health profile, coverage objectives, and timeline so the policy design matches the plan’s purpose.
About the Author:
Jason Stolz, CLTC, CRPC, is a senior insurance and retirement professional with more than two decades of real-world experience helping individuals, families, and business owners protect their income, assets, and long-term financial stability. As a long-time partner of the nationally licensed independent agency Diversified Insurance Brokers, Jason provides trusted guidance across multiple specialties—including fixed and indexed annuities, long-term care planning, personal and business disability insurance, life insurance solutions, and short-term health coverage. Diversified Insurance Brokers maintains active contracts with over 100 highly rated insurance carriers, ensuring clients have access to a broad and competitive marketplace.
His practical, education-first approach has earned recognition in publications such as VoyageATL, highlighting his commitment to financial clarity and client-focused planning. Drawing on deep product knowledge and years of hands-on field experience, Jason helps clients evaluate carriers, compare strategies, and build retirement and protection plans that are both secure and cost-efficient.
