Abstract explanations of how a Section 162 executive bonus plan works only go so far. Seeing actual numbers — even hypothetical ones — makes the strategy much easier to evaluate. Below are a few simplified examples showing how the bonus, tax treatment, and policy funding interact for executives at different ages and income levels. These are illustrative only; actual numbers depend on real underwriting and current tax rates.

Example 1: A Single Bonus for a Younger Executive

Consider a 38-year-old, healthy operations director earning $140,000 in base salary. The business wants to fund a policy with a $15,000 annual premium, targeting a meaningful death benefit and long-term cash value growth given the executive’s younger age. Using a single bonus structure, the business pays a $15,000 bonus, deductible as a business expense. The employee reports the full $15,000 as taxable income; assuming a combined federal and state marginal rate of roughly 30%, that leaves the employee owing about $4,500 in additional tax, which they pay from other income or reduced take-home pay, while the full $15,000 still funds the policy premium.

Example 2: A Double Bonus for a Mid-Career Executive

Now consider a 50-year-old sales VP earning $220,000, where the business wants the employee to feel minimal net tax impact from participating in the section 162 bonus plan. The target premium is $25,000 annually. Using a double bonus, and assuming the employee’s combined marginal tax rate is closer to 37%, the business would pay roughly $25,000 for the premium plus approximately $14,700 to offset the tax on the total $39,700 bonus (a simplified gross-up calculation), for a total annual cost to the business of around $39,700. The employee receives the full $25,000 net benefit toward the policy with minimal out-of-pocket tax cost.

Example 3: A Restricted Plan for a Long-Term Retention Goal

A business wants to retain a 44-year-old chief operating officer for at least seven more years. It sets up a restricted plan (a REBA) with an annual premium of $20,000, using a single bonus structure to control cost, and attaches a restrictive endorsement requiring seven years of continued employment before the executive gains full, unrestricted access to the policy’s cash value. If the executive leaves in year four, the endorsement’s terms determine what happens — commonly, the business reclaims the accumulated cash value, or the restriction simply causes the employee’s rights to that value to lapse, depending on how the endorsement was drafted.

Example 4: An Older Executive With a Shorter Funding Horizon

A 58-year-old key employee is being rewarded with a plan intended to fund over a shorter, roughly 10-year horizon before the executive’s expected retirement. Given the shorter timeframe and older age, underwriting typically results in a higher premium relative to the death benefit compared to a younger applicant. The business budgets $30,000 annually for 10 years — a total commitment of $300,000 — to fund a meaningful benefit within that compressed timeframe, illustrating how age materially affects both premium cost and the total funding needed to reach a comparable benefit level.

Example 5: Comparing Total Cost Across a Funding Period

It’s useful to look at the cumulative cost over time, not just the annual number. A $20,000 annual single bonus funded for 15 years represents a $300,000 total commitment from the business (before accounting for any changes in premium or plan adjustments), assuming consistent funding throughout. Running this kind of multi-year total, rather than evaluating only the first-year cost, gives a much more accurate picture of what the business is actually committing to.

What These Examples Illustrate

A few patterns emerge across these examples. Younger, healthier employees generally achieve more coverage per premium dollar, making early implementation more cost-efficient over a long horizon. Double bonus structures meaningfully increase total business cost but significantly reduce the employee’s net tax burden. And restricted plans add a retention mechanism without changing the fundamental cost math — the business pays the same premium either way, but gains additional protection if the employee departs before vesting.

These simplified examples are meant to illustrate the mechanics, not to serve as a quote. Actual section 162 life insurance premiums depend on real underwriting results, current interest rates, and the specific carrier and policy chosen, so it’s worth running real numbers for your specific executive before finalizing a budget.

Frequently Asked Questions

Are these example numbers accurate for my specific situation?

No — they’re simplified illustrations meant to show how the mechanics work, not actual quotes. Real premiums depend on underwriting results specific to your executive’s age, health, and the actual policy and carrier chosen.

How is the gross-up amount for a double bonus actually calculated?

It’s typically calculated using a formula that accounts for the employee’s marginal tax rate, grossing up the bonus so the employee’s net, after-tax benefit equals the target premium amount. Your CPA or provider can run the exact calculation based on current tax rates.

Why does age affect the premium so significantly?

Life insurance pricing is directly tied to mortality risk, which increases with age. An older applicant is statistically more likely to trigger a death benefit claim sooner, so insurers charge more to fund the same death benefit level.

Does a restricted plan cost more than an unrestricted plan?

No, the restriction itself doesn’t add to the insurance premium — it’s a legal and administrative structure layered on top of the same policy. The cost difference comes from the underlying policy design, not the restriction.

How do I get real numbers instead of these examples?

The most reliable way is to request a preliminary illustration from a provider based on your specific executive’s actual age, health class, and desired coverage amount.

Should I look at total cost over the life of the plan or just the annual premium?

Both matter, but total cost over the funding period gives a more complete picture of the business’s actual commitment, especially for plans intended to run for a decade or longer.