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FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY
2What is Business Insurance?
• The purchase of life insurance by an employer on the life of an employee
• Used to provide an additional benefit in an informally funded non-qualified deferred compensation plan or to protect the business in the event of the death of a key individual.
FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY
3Types of Business Life Insurance Plans
• Key Person
• Executive Bonus / REBAs
• Deferred Compensation Plan• Salary Deferral• SERPs
• Split Dollar
• Buy-Sell Arrangements
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5Key Person Insurance
• Insurance Policy taken out on the life of a key employee to protect the business in case of sudden death.
• A key employee is anyone in the business whose loss would affect profits and day-to-day operations.
• Owner, Partner, or irreplaceable executive
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6Benefits of Key Person Insurance
• Protects the business from financial loss due to the death of key employee
• Business may borrow from the policy cash value*
• Death benefit is received by the company directly free from income taxes**
* Withdrawals and loans from life insurance policies, which are classified as modified endowment contracts, may be subject to tax at the time of withdrawal. A federal tax penalty may also apply if the withdrawal or loan is taken before age 59 ½. Withdrawals and loans also have the effect of reducing the Death Benefit and Cash Surrender Value. Consult your Financial Advisor for more information.
** Although Key-Man Insurance does not require IRS approval the business must ensure they are compliant with IRS Code 101(j) to avoid possible taxation of death benefit for policies placed after 2006.
FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY
7How Does Key Person Insurance Work?
• Business purchases a life insurance policy on a key employee
• Business is the owner and beneficiary of the policy
• Business pays the entire premium.
Insurance Policy
BusinessEmployee
Employee = Insured Business = Owner / Beneficiary
Business has on-file a
signed 101(j) form by
employee
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9Non-Qualified Deferred Compensation
• Arrangements between an employee and executive to provide key executives with additional retirement benefits
• Selective and does not need to be offered to all employees
• Used to retain, recruit and reward key employees
10Types of Non-Qualified Deferred Compensation Plans
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Employee Financed
Employer/Employee Financed
Employer Financed
Group Plans
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11Employee Benefit Limits for 2015
Maximum 401(k) Contributions $18,000.00
Defined Benefit Amounts (Section 415)
$210,000.00
Highly Compensated Employee $120,000.00
Defined Contribution Limits $53,000.00
Limits on Compensation from Qualified Plans
$265,000.00
12Reverse Discrimination
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200,000 225,000 250,000 300,000 400,000 500,0000%
10%
20%
30%
40%
50%
60%
70%
Retirement Benefits as % of Final Salary
Retirement Income
13The Power of Deferred Compensation
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$10K Invested @ 5% $6K Invested @ 5%$0.00
$5,000.00
$10,000.00
$15,000.00
$20,000.00
$25,000.00
$30,000.00
10 yrs 15 yrs 20 yrs
Assumes lump sum deferral amounts of $10,000 growing over 20 years at 5% compared to a lump sum of $6,000 ($1-,000 at 40% after-tax_ also growing at 5% for 20 years.
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14Salary Deferral Plans
• Executives elect to defer part of their salary
• Often referred to as 401(k) mirror plans
• More flexible than standard Qualified Plans
• Do not have maximum deferral limits
• May exclude rank and file employees
• Executive financed plans
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15How Salary Deferral Plans Work
• Executive elects to defer a certain amount at the beginning of the year
• The amount is credited to a “phantom” interest bearing account
• Will be distributed for a certain period of time – starting at retirement
16The Power of Salary Deferrals
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Deferred Non-Deferred$0.00
$20,000.00
$40,000.00
$60,000.00
$80,000.00
$100,000.00
$120,000.00
$140,000.00
$160,000.00
$180,000.00
Column1
This example assumes a one-year deferral of $55,000 for 15 years into a phantom account growing at 7.5%. The non-deferred cash assumes the same $55,000 after-tax (40% income tax rate) at 7.5%. Total for deferred is $162,738.25 and non-deferred is $97,642.95
Salary Deferral Withdrawals
17The Salary Deferral Plan – The Concept
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Executive
Employer
Specifics:
• The executive agrees to defer a portion of income• The employer agrees to provide a specific flow of income at a specific future
time.• The employer uses the deferred income to purchase a policy. Policy benefits
are used to fund the agreed to retirement compensation.
Agreement to use deferral to purchase life
insurance policy
Agreement to defer a specified
amount of income
Employer purchases and owns the policy
Life Insurance Company
18The Salary Deferral Plan – The Structure
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Notes:
• The Employer is able to provide significant pre and post retirement benefits on a deferred basis.
• The Employer’s cost is significantly reduced and stabilized with complete recovery possible through direct receipt of tax free death benefit proceeds.
• The executive enjoys substantial retirement and family security benefits.
Executive
Beneficiaries
Employer
Cash Value to fund deferred compensation
Tax Free death benefit to fund
continuing compensation to
heirs
Life Insurance Policy
Pre Retirement Compensation
Post Retirement Compensation
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19Supplemental Executive Retirement Plan (SERP)
• Employer sponsored non-qualified deferred compensation plan
• Provides retirement benefits to highly compensated executives
• Can be used with qualified plans
• Combats “reverse discrimination”
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20How Does a SERP Work?
• Corporation and select executives enter into an agreement that pays the executives a certain amount at retirement
• Can be informally funded with life insurance
• Employer is the owner and beneficiary of the policy.
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21Executive Bonus Plans
• Employer/executive financed plans
• An arrangement between the executive and the corporation
• The corporation pays the premium on a life insurance policy on the executive
• Executive is the owner and beneficiary of the policy.
22Advantages of a Bonus Plan
• Corporation• Simple to install• No minimum or maximum lives• Employer cost may be tax deductible
• Executive• Death benefit protection• Supplemental retirement income• Can access the policy cash value at anytime
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*Withdrawals and loans from life insurance policies, which are classified as modified endowment contracts, may be subject to tax at the time the withdrawal or loan is made. A federal tax penalty may also apply if the withdrawal or loan is taken before age 59 1/2. Withdrawals and loans also have the effect of reducing the Death Benefit and Cash Surrender Value. Consult your Financial Advisor.
23How Does a Bonus Plan Work?
FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY
*Withdrawals and loans from life insurance policies, which are classified as modified endowment contracts, may be subject to tax at the time the withdrawal or loan is made. A federal tax penalty may also apply if the withdrawal or loan is taken before age 59 1/2. Withdrawals and loans also have the effect of reducing the Death Benefit and Cash Surrender Value. Consult your Financial Advisor.
Corporation Executive
Insurance Policy
IRS
Bonus Premium Amount
Pays Premium
In retirement, takes withdrawals
Pays tax to IRS on premium
24Restrictive Endorsement Bonus Arrangement (REBA)
• Employer financed plans
• Employer agrees to pay premium of life insurance policy to be owned by the executive
• Executive files a restrictive endorsement with life insurance company
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25Advantages of a REBA
• Corporation• Distinguished compensation package• Minimal set-up cost• “Golden handcuffs”
• Executive• Portable death benefit• Supplemental retirement income
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*Withdrawals and loans from life insurance policies, which are classified as modified endowment contracts, may be subject to tax at the time the withdrawal or loan is made. A federal tax penalty may also apply if the withdrawal or loan is taken before age 59 1/2. Withdrawals and loans also have the effect of reducing the Death Benefit and Cash Surrender Value. Consult your Financial Advisor.
26REBA Agreement
• Prevents the executive from• Surrendering the cash value• Taking loans and withdrawals from the policy• Changing ownership• Using the policy as collateral
• Executive Can• Name the beneficiary
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*Withdrawals and loans from life insurance policies, which are classified as modified endowment contracts, may be subject to tax at the time the withdrawal or loan is made. A federal tax penalty may also apply if the withdrawal or loan is taken before age 59 1/2. Withdrawals and loans also have the effect of reducing the Death Benefit and Cash Surrender Value. Consult your Financial Advisor.
28Advantages Split Dollar Plans
• Corporation• Death benefit protection• Access to cash values• Selective• Simple to implement
• Executive• Death benefit protection• Protects insurability
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29How Does a Split Dollar Plan Work?
• Corporation and executive enter into an arrangement
• The corporation will pay the bulk of the premium
• The executive pays the economic benefit amount.
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30Endorsement Method
• Mandatory for plans when the business seeks to recover amount in excess of premium paid, i.e. key person indemnity or deferred compensation.
• Ideal when control of the plan is to be with employer providing benefit, or a Non-Owner employee
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31Endorsement Method
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Corporate
Execu-tive
Relative Premiums
Policy Premium Split
32Endorsement Method
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Policy Proceeds Split
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
$2,000,000
Executive Death Benefit Excess Corportate Cash ValueCorporate Return of Premium
33Collateral Assignment Method
• In most cases it’s the customary method used to remove proceeds from majority shareholder’s estate
• Debtor-creditor relationship is created
• Places effective control in hands of insured/executive
• Ideal when ultimate objective is to provide continuing post-retirement coverage
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34Collateral Assignment Method
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Policy Cash Value Split
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
Balance To Executive Employer Return of Premium
35Collateral Assignment Method
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Policy Proceeds Split
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
$2,000,000
Balance To Executive's Beneficiary Employer Return of Premium
38Buy-Sell Arrangements
• A buy-sell arrangement is a binding agreement in which one party agrees to sell the interest and the other party will buy the interest.
• Transactions occur• At death• At retirement• At disability
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39Types of Buy-Sell Arrangements
• Stock Redemption or Entity Purchase• Cross Purchase• Wait and See
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40Stock Redemption or Entity Plan
• The business agrees to buy life insurance on the lives of the owners
• Agreement states that the owners or their estates agree to sell interest in the business and the business agrees to buy it.
• Business is the owner and beneficiary of the life insurance policy.
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41Stock Redemption or Entity Plan
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Pays Premiums
Agreement Agreement
During Lifetime
The Business owns insurance policies on each owner
Insurance Co.
Owner A Owner B
Business
42Stock Redemption or Entity Plan
FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY
Business
Pays Death Benefit
CashBusinessInterest
Upon A’s Death
Stock Passes
Owner B
A’s Family or Estate
Insurance Co.
43Cross-Purchase Plan
• Owners take life insurance policies out on each other
• Survivor purchases deceased owner’s shares in company
• Life insurance proceeds help to provide the funds
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44Cross Purchase Plan
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During Lifetime
Pays Premiums Pays Premiums
Business
Insurance Co.
Owner BOwner A Each Owner Obtains Insurance On the Other
45Advantages of Cross Purchase
• Purchasing shareholder will get step-up in cost basis
• Life insurance proceeds are income tax free
• Avoids possible treatment of redemption as a dividend.
• No AMT or accumulated earnings tax problems
• Can reallocate ownership of the surviving owners by purchasing varying amounts of the deceased owner’s shares.
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46Cross Purchase Plan
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Stock Passes
CashA’s Family or Estate
Business
Business Interest
Upon A’s Death
Pays Death Benefit
Insurance Co.
Owner B
47Wait and See Agreement
• Owners agree to buy and sell their shares but the price is not determined until death, retirement or disability
• Owners purchase life insurance on each other
• Business has right of first refusal, owner second right, and the business must purchase remaining shares
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48“Wait and See” funded by owners
FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY
During Lifetime
Each Owner Obtains Insurance On the Other
Pays Premiums Pays PremiumsBusiness
Agreement
Pays Premiums
Owner BOwner A
Insurance Co.
49“Wait and See” funded by owners
FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY
Upon A’s Death
Stock Passes
Death Benefit
Option toPurchase
2nd
Option toPurchase
MustPurchase
3rd1st $
$
$
Insurance Co.
Owner B
Business
A’s Family or Estate
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