What are some uses of life insurance in compensation planning?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 16, 2021

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Non-qualified deferred compensation plans: These pay future payments to certain selected employees for work performed now. The idea is to attract and retain employees considered important to the business’s success. These are typically funded with life insurance. The payments would typically begin following the employee’s retirement and would be taxable to the recipient at that time.

Bonus plans for key employees: These can provide life insurance to the employee as an extra for of compensation. The employee is paid a bonus and uses the money (after paying taxes) to pay for a life insurance policy. The employee has ownership of the policy and can access the cash value or change the beneficiary and the employer receives a tax deduction for the disbursements to the employee.

Supplemental retirement plans for executives: Since tax qualified defined contribution plans restrict the contributions by highly compensated individuals, supplemental plans can augment retirement for the key executives using cash value life insurance.

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