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How to choose the right strategy

Choosing executive compensation strategies

Businesses across industries — both small and large — want to recruit and retain top executives who are instrumental in growing the company.

With Business Owner Life-stage Design (BOLD), you empower business owners to create competitive compensation packages.

An executive compensation strategy that employs life insurance can reward and incent key employees by maximizing a business owner’s dollars. And offer even more options for businesses, compared to cash bonuses.

To determine the right strategy, ask business owners whether a death benefit or retirement income is more important to them.

Use the BOLD executive compensation questionnaire

Death benefit protection — how it works

The main purpose and advantage for using permanent, cash value life insurance is the death benefit. Some executive compensation strategies provide the death benefit to the executive, some to the employer, and others share the death benefit between the two parties.

Death benefit solely for the executive’s beneficiaries

In these situations, the death benefit is not needed by the employer. Overall, the death benefit is part of the benefit provided by the company, in addition to potential supplemental retirement income from the policy’s cash value.

Death benefit solely for the employer

In key person strategies, the company protects itself should the executive die. Upon a key person’s death, the death benefit can help cover lost sales, lower earnings or added costs for hiring and training a replacement.

In situations where the employer retention strategy calls for only supplemental employee retirement income, an employer may wish to recover the costs of its program through the policy death benefit.

Death benefit shared between employer and key employee’s beneficiaries

In split-dollar arrangements and some salary continuation strategies, the two parties may “split” or share the death benefit. The death benefit provides cost recovery for the employer, as well as additional incentive for the executive to remain with the company.

Death benefit recipient executive compensation strategies

Solely for executive's beneficiaries
  • Executive bonus
  • Golden executive bonus arrangement (GEBA)
  • Golden executive match (GEM)
  • Salary continuation
Solely for employer
  • Key person insurance
  • Supplemental executive retirement plan (SERP) — retirement income only for employee
Shared death benefit
  • Endorsement (key person plus)
Shared death benefit with salary continuation
  • Nonqualified deferred compensation (NQDC)
  • Bonus/salary deferral
  • SERP
  • Protection SERP
  • Employer match

Retirement income

The decision regarding retirement income requires the business owner to balance the timing of a potential tax deduction, versus the tax ramifications of the key employee receiving the income. Quite simply, the business owner will receive a tax deduction when the benefit is paid, and the executive will be taxed on the benefit at that time.

Strategies Business tax ramifications Key employee tax ramifications

Executive bonus



Tax deduction today Taxed today with future tax-advantaged access to cash value
NQDC Future tax deduction Tax deferral today but taxed in the future (possibly at a lower tax bracket)

Who pays

In most cases, the business will fund the arrangement, since it wishes to reward and retain the executive.

In a pure salary deferral NQDC strategy, the executive defers a bonus or a portion of salary into retirement, at which point the executive may be in a lower tax bracket. In other strategies, the employer may also want to match a percentage of the executive’s deferral.

When discussing who will fund the strategy, keep in mind:

  • Employee contributions are typically after-tax dollars (except NQDC salary deferral and employer match)
  • Business dollars have cost recovery potential with NQDC and split-dollar strategies

Business only Key employee only Mostly key employee

Executive bonus

  • Executive bonus
  • GEBA


  • Endorsement
  • Non-equity collateral assignment (employer-financed life insurance)
  • Loan regime


  • SERP
  • Protection SERP

Salary continuation

NQDC — Salary deferral GEM
NQDC — Employer match


“Golden handcuffs” are incentives an employer can offer key people to encourage their loyalty to the company. They contain stipulations spelling out benchmarks or timetables that must be achieved in order to gain access to the benefit.

Depending on the industry, the economy and current job market, golden handcuffs may not be necessary. Often, an executive bonus may be enough to keep them. However, it’s important to periodically review the strategies and their effectiveness.

Without golden handcuffs

  • Executive bonus arrangements
  • NQDC — Salary deferral

With golden handcuffs

Executive bonus

  • GEBA
  • GEM (Only on employer’s contribution)


  • Endorsement
  • Non-equity collateral assignment
  • Loan regime


  • Employer match (only on employer’s contribution)
  • SERP
  • Protection SERP

Salary continuation

Cost recovery

Depending on how important this is for the business owner, explore options for cost recovery and determine which strategies best suit their needs.

Strategies with business cost recovery

  • Split-dollar
  • Endorsement
  • Non-equity collateral assignment
  • Loan regime


  • Employee deferral-Employer match
  • SERP
  • Protection SERP

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Life insurance products contain fees, such as mortality and expense charges, (which may increase over time) and may contain restrictions, such as surrender periods.

Please keep in mind that the primary reason for purchasing life insurance is the death benefit.

Additional agreements may be available. Agreements may be subject to additional costs and restrictions. Agreements may not be available in all states or may exist under a different name in various states and may not be available in combination with other agreements.

Policy loans and withdrawals may create an adverse tax result in the event of lapse or policy surrender and will reduce both the surrender value and death benefit. Withdrawals may be subject to taxation within the first fifteen years of the contract. Clients should consult their tax advisor when considering taking a policy loan or withdrawal.

The Policy Design chosen may impact the tax status of the policy. If too much premium is paid, the policy could become a modified endowment contract (MEC). Distributions from a MEC may be taxable and if the taxpayer is under the age of 59 ½ may also be subject to an additional 10% penalty tax.    

An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Please consult a tax advisor for specific information. There are charges and expenses associated with annuities, such as surrender charges (deferred sales charges) for early withdrawals.

This information may contain a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.

For financial professional use only. Not for use with the public. This material may not be reproduced in any form where it is accessible to the general public.

DOFU 9-2022