in

Executive Bonus Plan in Canada: A Guide for Businesses

The Ultimate Guide to Executive Bonus Plan Insurance in Canada
The Ultimate Guide to Executive Bonus Plan Insurance in Canada

Executive bonus plans have emerged as a highly effective talent retention and reward strategy for Canadian organizations. This comprehensive guide examines how executive bonus plans work, benefits, costs, structuring approaches, regulations, and implementation best practices specifically for employers in Canada.

What Are Executive Bonus Plans in Canada?

What Are Executive Bonus Plans in Canada and The Key Benefits
What Are Executive Bonus Plans in Canada and The Key Benefits

An executive bonus plan is an employer-sponsored permanent life insurance policy used to incentivize, retain and provide supplemental compensation to valuable C-suite or senior management employees in Canada.

The core elements of executive bonus plans in Canada include:

  • The employer pays all premiums for the life insurance policy directly or through a bonus to the executive. This provides a tax-deductible way to provide additional compensation.
  • The executive being rewarded is the owner of the life insurance policy and gets to select beneficiaries who will receive the death benefit payout.
  • The plan functions as a retention incentive, performance reward, and extra benefit for the executive. Access to cash values and policy portability often become available after a set retention period.
  • Executive bonus plans refer to section 162 of the Canadian Income Tax Act, which allows companies to deduct reasonable compensation expenses like bonus arrangements. Therefore, they are sometimes called Section 162 executive plans in Canada.

Executive bonus plans represent a highly flexible approach for Canadian businesses to structure supplemental benefits, retirement income, family protection and incentive arrangements for valued executives.

Key Benefits of Executive Bonus Plans in Canada

Well-designed executive bonus life insurance plans offer significant advantages for both employers and employees:

Benefits to Canadian Employers

  • Tax deductions – Premiums are considered reasonable compensation and, therefore, tax-deductible business expenses under section 162 of the Income Tax Act if structured properly. This provides a cost-efficient supplemental compensation strategy.
  • Retention incentives – Executive bonus plans help retain key executives who might otherwise leave for better opportunities. The life insurance benefits and deferred access to cash value provide “golden handcuffs.”
  • Rewards performance – High-performing executives can be rewarded through prestigious benefits plans.
  • Flexible arrangements – Employers can place limits on accessing cash values in early years to align with retention periods. Benefits can be structured around business continuity needs.
  • Tax-deferred growth – The cash value within the life insurance policies grows tax-deferred, maximizing the asset value.

Benefits to Canadian Employees

  • Supplemental compensation – The premiums paid by the employer equate to supplemental monetary compensation beyond just salary.
  • Retirement income – Executives can take loans or withdrawals from the accumulated cash value on a tax-preferred basis to supplement retirement income.
  • Family protection – Death benefit payouts pass tax-free to named beneficiaries, protecting the executive’s family.
  • Unlimited benefits – Executive bonus plans are not limited by maximum contribution amounts like Registered Pension Plans (RPPs) and Registered Retirement Savings Plans (RRSPs).
  • Critical illness/disability access – Policy riders allow executives to access living benefits if disabled or diagnosed with a critical illness.
  • Portability – Benefits and policy cash value ownership stay with the executive even if they eventually leave the company.

In summary, appropriately constructed executive bonus plans are a win-win arrangement providing tax, retention, reward, compensation and retirement advantages to employers and executives.

How Executive Bonus Plans Work in Canada

How Executive Bonus Plans Work in Canada
How Executive Bonus Plans Work in Canada

The typical structure and process for executive bonus plans in Canada includes:

  • The employer takes out a permanent cash value life insurance policy on a key executive they want to retain and reward. Whole life insurance and universal life insurance policies are most commonly utilized, given their permanent death benefits and tax-preferred cash value accumulation.
  • On an ongoing basis, the employer pays all life insurance premiums annually, often structured as a bonus to the executive. Premiums are generally tax-deductible to the company.
  • The executive is listed as the owner of the life insurance policy. They can name beneficiaries of their choosing to receive the income-tax-free death benefit payout when they pass away.
  • Early access to cash values can be restricted by the employer for a set number of years or tied to a vesting schedule to incentivize the executive to remain with the company.
  • Once retired, the executive can access the policy’s cash value through withdrawals, policy loans, or other options provided by the insurance company. This allows them to supplement retirement income in a tax-advantaged manner.

Two popular types of bonus arrangements used to fund executive bonus plans in Canada are:

Single BonusDouble Bonus
Employer provides bonus equal to premium costEmployer provides two bonuses – one for premium and one to cover taxes
Executive pays taxes on the bonus amountMinimizes taxes paid by executive

In either case, the bonuses essentially transfer the cost obligation to the company in a tax-efficient manner.

What Do Executive Bonus Plans Cost in Canada?

The annual premium costs for executive bonus life insurance plans in Canada can vary substantially based on several factors:

  • Age and health of the executive – Premiums are higher for older executives in poorer health. Younger, healthy executives can have significantly lower premiums.
  • Coverage amount and death benefit – Larger death benefits to protect families have higher premiums. $1 million policies often range between $10,000 – $25,000 annually. $5 million+ policies can be $100,000+.
  • Type of life insurance product used – Whole life, universal life, and indexed policies all have different premium levels. Investment options also play a role.
  • Insurer underwriting process – Individual underwriting can increase premiums substantially versus simplified underwriting or guaranteed issue products. Employers can negotiate group pricing discounts.

According to the Conference Board of Canada, average executive bonus plan annual premiums range between:

  • $10,000 – $50,000 for a $1 million death benefit
  • $50,000 – $100,000+ for $2 – $5 million death benefits

As a general guideline, employers can potentially budget approximately 1-3% of the desired coverage amount for the annual premium costs of an executive bonus life insurance plan.

Tips for Setting Up Executive Bonus Plans in Canada

When establishing executive bonus plans in Canada, the following best practices are recommended:

Consult specialized advisors

Executive bonus plans have complex tax, legal, accounting and insurance elements. Work with advisors like:

  • Tax experts – To advise on tax deductibility of premiums and structure arrangements to maximize deductions.
  • Lawyers – To review compliance issues and draft the required legal agreements between the employer and executives.
  • Insurance brokers – To solicit quotes, select optimal products, negotiate pricing and implement plans.
  • Accountants – To conduct reasonableness tests on compensation and structure bonus payments.

Thoroughly assess finances and reasonable comp limits

Conduct financial analysis to assess budgeting capacity for premiums based on business performance. Review tax code limits on deducting reasonable compensation over $500k per employee when determining plan size.

Outline vesting schedules

Clearly define time-based vesting schedules at which point executives can access cash values without repayment. This aligns the benefits with retention periods.

Select appropriate products

Evaluate permanent products like whole life, universal life and indexed life to select features optimal for supplementing retirement income.

Coordinate with other executive benefits

Integrate executive bonus plans with other benefits like Deferred Profit Sharing Plans and executive pensions to optimize total rewards.

Analyze cost efficiency regularly

Review investment returns within policies, mortality costs and other pricing factors annually to ensure premium efficiency and adjust plans as needed.

Following structured best practices allows Canadian businesses to optimize the design and maintain the performance of executive bonus life insurance arrangements.

Where To Get Executive Bonus Plan Insurance in Canada

There are several options for Canadian companies to purchase executive bonus life insurance policies:

Major insurance carriers

Most large Canadian insurance companies offer executive bonus life insurance for businesses, including:

  • Sun Life Financial
  • Manulife
  • RBC Insurance
  • Canada Life
  • iA Financial Group
  • Equitable Life

They have national broker networks and can negotiate group pricing.

Independent brokers and MGAs

Specialized life insurance brokers and Managing General Agencies (MGAs) offer deep product expertise and can provide quotes across multiple carriers for the most favourable pricing.

Online marketplaces

Comparison sites like Lifebuzz.ca allow employers to get quotes and apply online for executive bonus plans.

Regardless of channel, working with advisors experienced in executive plans ensures optimal policy design and compliance.

Pitfalls to Avoid With Executive Bonus Plans in Canada

When implementing executive bonus plans, Canadian businesses should beware of these common pitfalls:

  • Exceeding reasonable compensation limits – Tax deductions may not apply to premiums if executive compensation is deemed excessive per tax code section 67.
  • Overlooking tax implications – Failure to structure plans properly can jeopardize deductibility. Also, we need to consider tax impacts on employees.
  • No reviews of plan performance – Should analyze investment returns, mortality costs and other factors annually to ensure efficiencies.
  • No post-retirement provisions – Plans should clearly define access to cash values and continuation options when executives retire.
  • Poor plan integration – Need to coordinate executive bonus plans with other benefits to create optimal total compensation.
  • Lacking clear vesting rules – Cash value access restrictions and schedules should be defined upfront in legal agreements to support retention periods.

Avoiding these missteps allows Canadian employers to realize the full benefits of executive bonus plans.

Key Considerations for Structuring Executive Bonus Plans in Canada

Key Considerations for Structuring Executive Bonus Plans in Canada
life buzz quote in canada new 8 1
Key Considerations for Structuring Executive Bonus Plans in Canada

Some additional items to consider when structuring executive bonus life insurance plans in Canada include:

  • Type of life insurance product – The main options are whole life, universal life, and indexed universal life, each with different cost structures.
  • Coverage amount – Need to balance desired death benefits to protect families with premium budget constraints.
  • Premium structure – Single vs. double bonus arrangements, payment frequency, growth strategy.
  • Policy ownership and beneficiary details – Plan documents should outline details on ownership and beneficiary designation rights.
  • Vesting schedule – Defining the timeline at which deferred benefits and cash value access are unlocked for the executive. This can be tied to years of service, age milestones or other retention factors.
  • Portability – Defining whether benefits can remain with the executive if they eventually leave the company.

Optimizing these structural factors allows employers to align executive bonus plans with their business goals and retention needs.

The Bottom Line on Executive Bonus Plans in Canada

Executive bonus plans enable Canadian businesses to attract, retain and reward key management team members through optimized life insurance arrangements.

These plans provide compelling benefits to both employers and executives when thoughtfully structured:

For Employers:

  • Tax deductions on premiums
  • Incentives to retain top talent
  • Rewards for performance
  • Tax-deferred cash value growth

For Executives:

  • Supplementary compensation
  • Retirement income supplements
  • Family protection through death benefits
  • Critical illness and disability access, if needed
  • Benefits not limited by registered plan caps

However, employers need specialized guidance from advisors to avoid missteps related to taxation, accounting, legal compliance, appropriate product selection, and vesting definitions when designing executive bonus plans.

Need Help Setting Up an Executive Bonus Plan?

Contact a life insurance specialist to discuss structuring a customized executive bonus plan for your Canadian organization. Our team can guide you through plan options, pricing, regulations, tax considerations, and implementation best practices. Invest in a win-win incentive strategy to retain your irreplaceable leaders.

Frequently Asked Questions (FAQs)

What insurance policy types are most commonly used for executive bonus plans in Canada?

Whole life, universal life, and indexed universal life tend to be used most often due to their permanent death benefits, cash accumulation options, and tax advantages.

Do executives pay income tax on premium bonuses received through executive bonus plans in Canada?

Yes, any bonus amounts received to cover premiums are considered taxable income to the executive. Some plans provide an additional bonus to cover these taxes.

Can independent insurance brokers assist with setting up executive bonus plans in Canada?

Yes, many specialized brokers offer services to design, quote, negotiate, and implement executive bonus plans on behalf of employers.

What is the process for making a death benefit claim on an executive bonus plan in Canada?

The beneficiary or executor will need to notify the insurance company and provide a death certificate. The insurer will then process the claim and pay out the death benefit.

How are premium payments made for executive bonus plans in Canada?

Premiums can be paid annually, semi-annually, quarterly, or monthly by the employer or from a bonus provided to the executive.

Do executives have to undergo medical underwriting for executive bonus plans in Canada?

Yes, full individual underwriting requiring a medical exam and bloodwork is typical, although simplified underwriting may be possible in some group plan scenarios.

Can executive bonus plan benefits be continued if the executive becomes disabled in Canada?

Yes, disability waiver of premium riders can be added to the policy to continue premium payments and coverage if the executive becomes disabled.

How does portability work for executive bonus plans in Canada?

Portability allows the executive to maintain ownership of the policy and its benefits even after ending employment with the company sponsoring the plan.

How are executive bonus plans funded for small businesses in Canada?

For small companies, Key Person insurance can be used to fund executive benefits. This insures the executive's life to protect the business.

What are survivor benefits in an executive bonus plan in Canada?

Survivor benefits refer to the death benefit payouts from the life insurance policy that go to the executive's designated beneficiaries after they pass away.

Can executive bonus plans help fund buy-sell agreements in Canada?

Yes, executive bonus plans could be integrated with buy-sell funding arrangements to provide liquidity for business transitions after death.

What constitutes reasonable compensation for executive bonus plans in Canada?

Factors like executive duties, experience, company size and profitability help define reasonable limits for deduction of premiums in bonus plans.

Do universal life or whole life policies work better for executive bonus plans in Canada?

Universal life policies provide more flexibility, while whole life policies offer guaranteed premiums. Companies should analyze which option best fits their needs.

Are there any age limits on obtaining executive bonus plans in Canada?

There are typically no set age limits, but costs become more expensive for older executives due to higher mortality risk, making budgets a limiting factor.

Can a financial advisor assist with designing executive bonus plans in Canada?

Yes, financial advisors and insurance professionals can provide guidance on structuring plans and selecting appropriate insurance products based on an organization's needs and goals.

What life insurance policy options are not suitable for executive bonus plans in Canada?

Term life insurance is generally not suitable given its lack of permanent coverage. Variable life products involve market risk making costs unpredictable.

How are executive bonus plans monitored over time in Canada?

Plans should be reviewed regularly regarding costs, documentation, vesting status, product performance, and alignment with the employer's retention objectives.

Can executive bonus plans cover multiple executives at a company in Canada?

Yes. Companies often design master plans that cover several key executives, with individually issued policies under the larger program.

Article Sources:

Gain insight into our unwavering dedication to accurate and transparent reporting with a focus on editorial independence by perusing the Editorial Policy of Lifebuzz.ca. Our pride in being recognized as the most reliable source

  1. Life Insurance For Executives – https://www.bflcanada.ca/
  2. How an executive bonus plan is a win-win for employers & key employees – https://blog.fglife.com/
  3. Executive Bonus Plans – https://www.nfp.com/
  4. Executive Bonus Life Insurance: What it is and How it works – https://www.globalfd.com/
Rate this post

Written by Ben Nguyen

Ben Nguyen is an award-winning insurance expert and industry veteran with over 20 years of experience. He is the chairman and director of IDC Insurance Direct Canada Inc., one of Canada's leading online insurance brokerages.

Ben is renowned for his extensive knowledge of life, health, disability, and travel insurance products. He is the prolific author of over 1,000 educational articles published on LifeBuzz, BestInsuranceOnline, and InsuranceDirectCanada. His articles provide Canadians with advice on making smart insurance decisions.

With a Bachelor's degree in Actuarial Science and a Fellow of the Canadian Institute of Actuaries (FCIA) designation, Ben is frequently interviewed by media as an insurance industry spokesperson.

He has received numerous honors including the Insurance Council of Canada’s Pivotal Leadership Award, the Canadian Insurance Hall of Fame induction, and the President’s Medal from the Canadian Institute of Actuaries.

Ben continues to shape the vision and strategy of IDC Insurance Direct as chairman. He is dedicated to advancing the insurance industry through his insightful leadership.

Leave a Reply

Your email address will not be published. Required fields are marked *

GIPHY App Key not set. Please check settings

    Mastering Buy-Sell Agreements - A Comprehensive Guide for Business Owners in Canada

    Buy-Sell Agreements in Canada: A Guide for Business Owners

    Comprehensive Guide To Shareholder/Partner Insurance In Canada

    Shareholder/Partner Insurance in Canada: A Complete Guide