Executive Bonus Plan Calculator (2026): What Section 162 Coverage Really Costs the Business
An executive bonus plan is the simplest executive benefit in the entire insurance code: the business pays an extra bonus to a key employee, the employee uses that bonus to pay the premium on a life insurance policy they own outright, and the business deducts the bonus under IRC Section 162 just like any other compensation. No trust, no legal documents, no deferred-compensation committee. The employee owns the policy, the cash value grows tax-deferred, and the death benefit pays out income-tax-free to their family.
The catch is that the business never pays only the premium. Because the bonus is taxable income to the executive, the business either funds a smaller policy than it intended or it grosses up the bonus — a double bonus that covers the executive’s tax bill as well. This calculator shows the real, after-tax cost of that arrangement: the annual bonus required, the executive’s tax, the employer’s deduction and net cost, the death benefit that money buys at the executive’s age, and the projected cash value the executive accumulates.
Executive Bonus (Section 162) Plan Cost Estimator
Set the annual premium you want to fund for a key executive. The tool shows the bonus the business must pay, the executive’s tax, the employer’s after-tax cost, and the death benefit that money buys.
Delivering the same premium four ways
| Method | Employer outlay / yr | Employer after-tax / yr | Executive’s tax | To the executive |
|---|
Premiums, cash value, and death benefit over time
| After year | Cumulative premium | Projected cash value | Death benefit |
|---|
Illustrative 2026 whole life rates. Death benefit is derived from a level premium estimate at the executive’s issue age, gender, and health class, and assumes no tobacco use unless selected. Cash value is shown as a percentage of cumulative premiums and is not guaranteed. Actual premiums, cash surrender values, and available face amounts vary by carrier, state, and payment mode — always review the carrier illustration before funding a plan.
Compare Executive Life Insurance Quotes →What Is an Executive Bonus Plan?
An executive bonus plan — sometimes called a Section 162 plan after the tax code section that authorizes it — is a selective executive benefit built on four moving parts. The employer pays a cash bonus to a chosen executive. The executive uses that bonus to pay the premium on a life insurance policy the executive owns personally. The employer deducts the bonus as an ordinary and necessary business expense under IRC Section 162. And because the policy belongs to the executive, the cash value grows tax-deferred and the death benefit passes to the executive’s beneficiaries free of income tax under IRC Section 101(a).
The reason business owners use this structure is its simplicity. There is no trust to draft, no non-qualified deferred compensation plan document to administer, no ERISA plan filing, and no long-term commitment from the employer beyond the years it chooses to pay. Compare that to a deferred compensation plan, which requires a written plan, strict Section 409A compliance, and an unfunded promise that sits as a general creditor claim on the company’s balance sheet. An executive bonus plan transfers real, owned assets to the executive on day one.
The trade-off is equally simple: the executive pays income tax on every bonus dollar. A $25,000 premium paid as a single bonus creates a $25,000 taxable event for the executive, who nets roughly $17,000 after a 32% marginal rate and therefore funds a smaller policy than the business intended. That gap is exactly why most plans use a gross-up.
Because the plan is selective, the employer chooses who participates. There is no requirement to cover all employees, which is what separates an executive bonus plan from a qualified retirement plan or a Section 79 group carve-out that must satisfy nondiscrimination testing. That selectivity is the reason it remains the default “golden handcuffs” benefit for owner-operators of closely held businesses.
How the Calculator Values the Plan
The estimator works from a single input the business actually controls: the annual premium it wants to fund. From there it derives everything else. With gross-up switched on, the annual bonus equals the premium divided by one minus the executive’s marginal tax rate, so the executive nets exactly the target premium after paying tax. With gross-up switched off, the bonus equals the premium itself and the executive keeps only the after-tax remainder — the calculator reflects that by funding the policy at the smaller net amount.
The death benefit is derived from a level whole life premium estimate for the executive’s issue age, gender, and health class. A dollar of annual premium buys far more coverage at 40 than at 65, because mortality cost accelerates sharply in the last two decades of the working years. The tool also projects accumulated cash value as a percentage of premiums paid, rising from roughly a quarter of premiums at year five to about three quarters by year twenty — the standard shape of a participating whole life contract.
Finally, the tool computes the metric that actually answers “is this worth it?”: death benefit per dollar of after-tax employer cost. That single ratio combines the tax treatment, the executive’s age, and the policy’s pricing into one number the business can compare against a term-insurance alternative or a deferred compensation promise.
Gross-Up Math: What the Business Actually Pays
A gross-up (double bonus) is a second bonus equal to the executive’s tax liability on the first bonus, so the executive ends up whole. The arithmetic is a single division: bonus equals target premium divided by one minus the marginal rate. At a 32% rate, funding a $25,000 premium requires a $36,765 bonus; the executive pays $11,765 of tax and has exactly $25,000 left for the premium. Lower tax brackets require a much smaller gross-up — which is why an executive in the 22% bracket is considerably cheaper to gross up than one in the 37% bracket.
| Executive’s bracket | Annual bonus required | Executive’s tax | Employer after-tax cost |
|---|---|---|---|
| 22% | $32,051 | $7,051 | $25,321 |
| 24% | $32,895 | $7,895 | $25,987 |
| 32% | $36,765 | $11,765 | $29,044 |
| 35% | $38,462 | $13,462 | $30,385 |
| 37% | $39,683 | $14,683 | $31,349 |
Two things are easy to miss. First, the employer’s after-tax cost in the far-right column assumes a 21% corporate bracket — every bonus dollar is deductible, which is what makes the structure attractive in the first place. A pass-through entity in the 29.6% bracket deducts more and nets a lower after-tax cost on the same bonus, so the plan is usually cheapest inside a flow-through business. Second, the gross-up itself is fully deductible, so the business is effectively sharing the executive’s tax burden with the federal government rather than absorbing it alone.
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How Much Coverage $25,000 Funds, by Executive Age
The table below fixes the annual premium at $25,000, the executive as a male non-smoker in the Preferred class, and the funding period at twenty years. The only variable is issue age. Coverage falls by roughly 83% between age 40 and age 65 even though the business pays the identical premium every year — the clearest illustration of why permanent insurance is a young executive’s tool.
| Executive age | Rate per $1,000 / mo | Death benefit funded | 20-year premiums | Projected cash value |
|---|---|---|---|---|
| 40 | $1.75 | $1,190,000 | $500,000 | $380,000 |
| 45 | $2.45 | $850,000 | $500,000 | $380,000 |
| 50 | $3.50 | $595,000 | $500,000 | $380,000 |
| 55 | $5.00 | $417,000 | $500,000 | $380,000 |
| 60 | $7.20 | $289,000 | $500,000 | $380,000 |
| 65 | $10.50 | $198,000 | $500,000 | $380,000 |
The policy is funded with the same total dollars in every row, and the cash value accumulates along the same curve — so the real decision for an older executive is not whether the cash value is worth it, but whether a $198,000 permanent death benefit is worth $500,000 of premiums when a 20-year term policy would cost a fraction of that. For a 45- or 50-year-old executive who will hold the policy for life, the permanent contract wins on the tax-deferred cash value. For a 65-year-old who needs pure protection, it usually does not.
Executive Bonus vs. Deferred Comp vs. Group Carve-Out vs. Split-Dollar
Executives have four mainstream structures available, and they differ on when the business gets its deduction, when the executive pays tax, and who owns the policy. The comparison below is the decision matrix most closely held businesses use to choose between them.
| Feature | Executive bonus (Section 162) | Deferred comp (409A) | Group carve-out (Section 79) | Split-dollar |
|---|---|---|---|---|
| Employer deduction timing | Immediate (when bonus is paid) | Deferred until benefits are paid | Immediate for the group term element | Limited — only the economic benefit |
| Executive’s tax | Now, on the full bonus | At payout, as ordinary income | Now, on the Table I economic benefit | Now, on the economic benefit |
| Policy ownership | Executive | Employer (unfunded promise) | Employer, with an endorsement | Split by agreement |
| Cash value access | Executive, via policy loans | None until separation | Employer only | Shared per agreement |
| Death benefit | Income-tax-free to the executive’s family | Taxable when paid | Employer recovers cost; net paid to family | Split per agreement |
| Portability if executive leaves | Full — the executive owns the policy | Often forfeited unless vested | Usually lost | Depends on the agreement |
| Best for | Selective retention benefit, simplicity | Long-tenured executives, no current cost | Owners and highly compensated employees | Business owners funding large policies |
The practical rule: choose an executive bonus plan when you want the executive to own a real asset with no legal documents and an immediate deduction. Choose deferred compensation when the executive values a larger future payout and the business wants to keep the cash working in the company. Choose a carve-out when the business itself wants to own the policy and deduct the economic benefit. And use split-dollar when an owner needs to fund a large permanent policy and is willing to share the economics with the company.
Key Takeaways
- An executive bonus plan is a Section 162 arrangement: the business deducts a bonus, the executive owns the policy, and the death benefit passes income-tax-free.
- Because the bonus is taxable to the executive, most plans use a gross-up — a bullet dollar equals the target premium divided by one minus the executive’s marginal rate.
- At a 32% executive bracket and a 21% corporate bracket, funding a $25,000 premium costs the business $29,044 after tax per year.
- The same $25,000 annual premium buys $1,190,000 of coverage at age 40 but only $198,000 at age 65.
- Permanent insurance suits younger executives who will hold the policy for life; older executives needing pure protection are usually better served by term.
Steps to Set Up an Executive Bonus Plan
- Decide who participates. Executive bonus plans are selective, so name the specific executives the business wants to retain.
- Set the annual premium the business is willing to fund and confirm the full after-tax cost using the calculator above.
- Choose between a single bonus and a gross-up (double bonus) based on what the executive should net after tax.
- Have the executive apply for and own the policy — the executive must be the owner, the insured, and the beneficiary of any death benefit payable to family.
- Review the carrier illustration for guaranteed versus projected cash value and confirm the premium is sustainable for the funding period.
- Document the bonus in the executive’s compensation arrangement and consider a written agreement that ties continued funding to continued service.
- Revisit the plan annually as brackets, business income, and executive roles change.
Watch: Life Insurance for Business Owners
This short explainer covers how business owners use life insurance as an executive and retention benefit.
Frequently Asked Questions
What is an executive bonus plan?
An executive bonus plan is a selective benefit in which an employer pays a cash bonus to a key executive, who uses it to pay the premium on a life insurance policy the executive owns. The employer deducts the bonus under IRC Section 162, the executive pays income tax on it, and the policy’s cash value grows tax-deferred while the death benefit passes to the executive’s beneficiaries free of federal income tax.
How does Section 162 make the bonus tax-deductible?
IRC Section 162 allows a business to deduct ordinary and necessary expenses, including reasonable compensation. Because the executive bonus is structured as additional compensation, the employer deducts it exactly like salary. The deduction is available in the year the bonus is paid, which is one of the plan’s main advantages over deferred compensation, where the deduction is generally deferred until benefits are actually paid.
What is a double bonus or gross-up?
A double bonus (gross-up) is a second payment equal to the executive’s income tax on the first bonus, so the executive has the full premium available after tax. The math is straightforward: divide the target premium by one minus the executive’s marginal tax rate. At a 32% rate, funding a $25,000 premium requires a $36,765 bonus — the executive pays $11,765 of tax and keeps $25,000 for the premium.
Who owns the life insurance policy in an executive bonus plan?
The executive owns the policy outright. That ownership is what makes the arrangement work: the cash value belongs to the executive, policy loans are the executive’s to take, and the death benefit is paid to the executive’s named beneficiaries free of income tax. The employer cannot reclaim the policy when the executive leaves, which is why the plan doubles as a strong retention incentive.
How is an executive bonus plan taxed to the executive?
The bonus is taxed as ordinary income in the year it is paid, and the employer reports it on the executive’s Form W-2. Any death benefit is received income-tax-free by the executive’s beneficiaries under IRC Section 101(a). Cash value inside the policy accumulates without current taxation, and policy loans generally are not taxable as long as the policy stays in force.
Is an executive bonus plan better than deferred compensation?
It depends on what the executive values. An executive bonus plan delivers real, owned assets now, allows an immediate employer deduction, and requires almost no legal documents — but the executive pays tax today. Deferred compensation defers the executive’s tax and can promise a larger future amount, but the benefit is an unfunded promise, subject to Section 409A rules and to the company’s creditors. Businesses that want simplicity and owned assets choose the bonus plan.
Can the employer restrict the executive’s access to the policy?
Because the executive owns the policy, the employer cannot legally restrict access to the cash value. The employer can only create a practical incentive to stay by tying future bonus payments to continued service — that is the “golden handcuffs” effect. Some employers pair the plan with a written agreement that spells out the expectation of continued funding, but ownership and control of the policy remain entirely with the executive.
Related Resources
- Business Owners Life Insurance Calculator — key person, buy-sell, and loan protection
- Buy-Sell Agreement Life Insurance Calculator — fund an ownership succession plan
- The Section 79 Plan — group carve-out coverage for owners and executives
- MEC Life Insurance Calculator — will an overfunded executive policy fail the 7-pay test?
- IUL Cash Value Calculator — project indexed growth on a policy the executive owns
- Whole Life Cash Value Calculator — dividends, paid-up additions, and projected value
- AM Best — verify a carrier’s financial-strength rating before funding a plan
- NAIC — consumer resources and policyholder rights
- IRS Publication 525 — how bonuses and life insurance benefits are taxed
An executive bonus plan is the rare benefit that satisfies both sides of the table: the business deducts every dollar it pays, and the executive walks away owning an asset that grows tax-deferred and pays out income-tax-free. The only number that decides whether it works is the real, after-tax cost per dollar of death benefit — run your own figures with the calculator above, then compare quotes from carriers that specialize in executive benefit contracts before you commit.
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Modeling the employer-funded side of an executive benefit package? Pair it with the Executive Deferred Compensation (409A) Calculator to see the deferral trade-off side by side.
