Tax Savings For
Businesses 

Indexed Universal Life (IUL) insurance transforms from a personal wealth vehicle into a strategic tax-advantaged tool for businesses, beginning with the implementation of an Executive Bonus arrangement, formally known as a Section 162 plan. Under this powerful strategy, the business furnishes a cash bonus to a key employee, often a top executive or the owner, who then applies these funds to pay the premium on a personally-owned IUL policy. The financial leverage for the company lies in the fact that this bonus payment is generally tax-deductible for the business, provided the overall compensation is deemed reasonable. This arrangement effectively permits the company to use pre-tax dollars to offer a highly valuable, non-qualified supplemental benefit, used to selectively reward a key member of the business. To maximize the appeal and ensure the policy is fully funded, the business frequently incorporates a "tax gross-up" bonus to cover the employee's subsequent income tax liability.

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Beyond the immediate tax deduction for the business, the IUL policy's cash value component offers significant tax advantages for the employee. The cash value grows on a tax-deferred basis, meaning the investment gains are not taxed as they accumulate. Furthermore, when structured properly (avoiding Modified Endowment Contract or MEC status), the employee can access the cash value during retirement through policy loans and withdrawals, which are generally received income-tax-free. This creates an invaluable source of supplemental retirement income that is not subject to the contribution limits or required minimum distributions (RMDs), associated with traditional qualified retirement plans. For businesses, offering this tax-efficient growth potential through the IUL is a powerful "golden handcuff" strategy to secure the loyalty of key staff members for the long term.

 

The IUL's primary feature, the death benefit, also offers a powerful tax-free funding mechanism for business continuity. In the context of a buy-sell agreement, co-owners or businesses themselves can purchase IUL policies on the lives of other owners. Upon the death of an insured owner, the beneficiaries of the policy receive the death benefit, which is generally paid to the business or the surviving partners income-tax-free. These funds provide the necessary liquidity to execute the buy-sell agreement, allowing the surviving owners to purchase the deceased owner's share of the business at a pre-determined price. This ensures a smooth, non-taxable transfer of ownership, preventing legal disputes, preserving the business's financial health, and guaranteeing a fair price for the deceased owner's estate.