In a Section 162 plan, a company pays a key executive a tax-deductible bonus which is then used to buy a cash-value life insurance policy owned by that executive. This serves as an informal supplemental retirement plan, as the executive can take loans from the cash value of the policy. Companies may also give the executive a second bonus, contingent on continuing employment, to cover the costs of the taxes on the bonus used to buy the life insurance. Upon the executive’s death, the insurance payments go to his or her designated beneficiaries.

For details, see the article on this type of plan.