Certified Financial Consultant (CFC) Practice Exam

In the context of an Executive Bonus, which statement is incorrect?

1. The policy is owned by the company

2. Any type of insurance policy may be used

3. The employer pays a bonus to fund the policy

4. It is considered a qualified retirement benefit

The correct answer is: It is considered a qualified retirement benefit

In the context of an Executive Bonus, identifying the statement that refers to it as a qualified retirement benefit is indeed incorrect. An Executive Bonus is a type of compensation arrangement that allows employers to provide additional benefits, often in the form of life insurance policies, to key employees. The employer pays a bonus that the employee can then use to purchase a life insurance policy; however, this arrangement does not qualify as a retirement benefit under tax law. Qualified retirement benefits typically involve plans that meet specific criteria set by the Internal Revenue Service (IRS) for contributions, distributions, and tax treatment, such as 401(k) plans or pensions. In contrast, an Executive Bonus Plan involves an immediate cash bonus to the employee rather than a systematic savings or investment vehicle aimed at retirement. As such, it does not fall under the category of qualified retirement plans, which have different regulatory requirements. The other statements are accurate in describing the nature of an Executive Bonus. The policy can indeed be owned by the company, any type of insurance policy may be utilized, and the employer’s financial contribution to the insurance policy occurs through a bonus payment, highlighting the structured compensation aspect of this strategy.