Plenty of businesses set up an executive bonus plan years ago, funded a life insurance policy for a key employee, and haven’t looked at it since. That’s a problem. Life insurance policies aren’t static — interest crediting rates change, cost of insurance charges rise as the insured ages, and the original assumptions used to illustrate the policy at issue may no longer hold. A plan that looked airtight at setup can quietly underperform for a decade before anyone notices, sometimes not until the policy is at risk of lapsing.

If it’s been more than two or three years since anyone reviewed your company’s section 162 life insurance arrangement, here’s what a proper review should cover.

Step 1: Request an In-Force Illustration

An in-force illustration is a current snapshot of the policy — actual cash value, actual death benefit, and a projection of how the policy performs going forward based on current, not original, assumptions. This is the single most important document in a plan review. Compare it against the original illustration from when the policy was issued. If the current interest crediting rate or dividend scale is meaningfully lower than what was originally projected, the policy may need additional funding to stay on track, or it may be headed toward lapse well before the executive’s retirement age.

Step 2: Confirm the Bonus Structure Still Matches Reality

Executive compensation changes. If the employee’s salary, bonus structure, or tax bracket has shifted significantly since the plan was set up, the original bonus amount may no longer make sense. A bonus that was calculated to cover the premium plus a tax gross-up five years ago may now be under-covering the premium if costs have risen, or it may have become disproportionate to the executive’s current role if their compensation has changed substantially. Reasonable compensation rules matter here too, particularly for owner-employees, so it’s worth re-confirming the bonus is still defensible as ordinary and necessary business expense.

Step 3: Revisit Ownership, Beneficiary, and Endorsement Details

Ownership structures should be double-checked, especially if the plan includes a restrictive endorsement (a Restricted Executive Bonus Arrangement, or REBA) that limits the employee’s access to cash value until a vesting condition is met. Confirm the beneficiary designation still reflects the employee’s intent — marriages, divorces, and new dependents are common reasons this falls out of date. If the business has changed ownership, merged, or been acquired since the plan was set up, verify the plan was properly assigned or re-documented in the transaction.

Step 4: Check Whether the Policy Type Still Fits

Some policies purchased 10 or 15 years ago, particularly older universal life products, were built on assumptions about interest rates that no longer hold in today’s environment. If a review shows the policy is underperforming and would require substantially higher premiums to maintain the original death benefit, it may be worth comparing the in-force illustration against what a repositioned policy could offer, rather than simply increasing funding into an underperforming chassis. This isn’t a decision to make casually — a 1035 exchange has its own rules and potential costs — but it should at least be evaluated with current numbers in hand.

Step 5: Confirm the Tax Treatment Is Still Being Handled Correctly

Payroll and accounting turnover happen. It’s worth confirming with your current CPA or bookkeeper that the bonus is still being run through payroll correctly, reported on the employee’s W-2, and taken as a deductible business expense on the company’s return. It’s not uncommon to find that a plan set up under a prior accountant has drifted — for example, the bonus being paid but never properly reported, which creates exposure for both the business and the employee.

Step 6: Decide Whether the Plan Still Serves Its Original Purpose

Finally, step back and ask why the plan was set up in the first place. If it was meant to retain a specific key employee and that employee has since left, the business needs a decision about what happens to the policy. If it was meant to reward performance and the executive’s role has grown substantially, it may be time to consider whether the benefit level should grow with it. A periodic review is the natural point to have that conversation, rather than letting the plan run on autopilot indefinitely.

A review doesn’t need to happen every year, but a checkup every two to three years — or any time there’s a major change in the business, the executive’s role, or interest rates broadly — keeps a section 162 executive life insurance plan doing what it was designed to do instead of quietly drifting off course.

Frequently Asked Questions

How often should a Section 162 plan be reviewed?

Every two to three years is a reasonable baseline, with an additional review any time there’s a major change — a shift in the executive’s compensation, an ownership change at the company, or a noticeable shift in interest rates or the insurance carrier’s dividend scale.

What is an in-force illustration and why does it matter?

It’s an updated projection of the policy’s performance based on current values and current assumptions, rather than the assumptions used when the policy was first issued. It’s the clearest way to see whether a policy is on track, underfunded, or at risk of lapsing.

What happens if the review finds the policy is underfunded?

Depending on the policy type, the business may need to increase the bonus and corresponding premium to keep the policy on its original trajectory, or consider restructuring the plan. The right fix depends on the specific illustration numbers and how many years remain until the intended benefit is needed.

Who should be involved in a Section 162 plan review?

At minimum, the insurance provider or agent servicing the policy and the company’s CPA. If the plan includes a restrictive endorsement or the business has changed ownership, an attorney familiar with the original agreement should be included as well.

Can a plan review lead to switching insurance carriers?

It can, though this should be evaluated carefully. A 1035 exchange can move cash value into a new policy without immediate taxation, but surrender charges, new underwriting, and a new cost of insurance schedule all factor into whether a switch actually improves the plan.

Is a plan review necessary if the policy seems fine?

Yes, because performance issues in permanent life insurance are often not visible without an in-force illustration. A policy can look fine on a statement while quietly needing more premium than originally planned to reach its target death benefit.