for broker/dealer and general agent use only. 1 business planning using life insurance retain,...
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FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.1
Business Planning Using Life Insurance
Retain, Recruit, and Reward
Manulife Financial and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Companyand are used by it and its affiliates including Manulife Financial Corporation. Copyright 2002. The Manufacturers Life Insurance
Company (U.S.A.) All rights reserved. MLI0504018904. Expires 12/31/2002.
THIS MATERIAL MAY NOT BE COPIED OR USED WITH THE PUBLIC.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.2
An Introduction
• Business Insurance is:– 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 GENERAL AGENT USE ONLY.3
Business Life Insurance Plans
• Key Person• Executive Bonus/REBAs• Deferred Compensation Plan
– Salary Deferral– SERPs
• Split Dollar• Buy-Sell Arrangements
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.4
Key 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.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.5
Benefits 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 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 Manulife Financial Representative.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.6
How Does Key Person Insurance Work?
• Business buys a life insurance policy on a key employee
• Business is the owner and beneficiary of the policy
• Business pays the entire premium
Employee
Key Person Insurance
BusinessManulife Financial Insurance Policy
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Non-Qualified Executive Benefit Plans
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Non-Qualified Deferred Compensation
• Arrangements between an employer 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
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.9
Types of Non-Qualified Deferred Compensation Plans
Employee FinancedEmployee Financed Employer/Employee Employer/Employee FinancedFinanced
Employer FinancedEmployer Financed Group PlansGroup Plans
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.10
Employee Benefit Limits for 2002
Maximum 401(k) Contributions $ 11,000
Defined Benefit Amounts (Section 415)
$160,000
Highly Compensated Employee
$ 90,000
Defined Contribution Limits $ 40,000
Limits on Compensation from Qualified Plans
$200,000
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.11
Reverse Discrimination
0%
10%
20%
30%
40%
50%
60%
$200K $225K $250K $300K $400K
Retirement Benefits as % of Final Salary
Salary
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.12
The Power of Deferred Compensation
$0$5,000
$10,000$15,000$20,000$25,000$30,000$35,000$40,000$45,000$50,000
$10K invested at 8% $6K invested at 8%
10yrs15yrs20yrs
Assumes lump sum deferral amount of $10,000 growing over 20 years at 8% compared to a lump sum of $6,000 ($10,000 at 40% after-tax) also growing at 8% for 20 years.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.13
Salary Deferral Plans
• Executives elect to defer part of their salary• Often referred to as 401(K) mirror plans• More flexible than standard Qplans• Do not have maximum deferral limits• May exclude rank and file employees• Executive financed plans
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.14
How 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
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Power of Salary Deferrals
$0
$50,000
$100,000
$150,000
$200,000
$250,000
Dollars
Deferred Non-Deferred
Total Avaiable
Salary Deferral Withdrawals
Deferred Non-Deferred
This example assumes a one-year deferral of $55,000 for 15 years into a phantom account growing at 10%. The non-deferred cash assumes the same $55,000 after-tax (40% income tax rate) at 10%. Total for deferred is $229.749 and non-deferred is $137,849.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.16
The ConceptThe Concept
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.
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.
The Salary Deferral Plan
ExecutiveExecutiveAgreement touse deferral topurchase lifeinsurance policy
Agreement todefer a specifiedamount of income
Employer purchasesand owns the policy
EmployerEmployer
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The StructureThe Structure
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 proceeds.
•The Executive enjoys substantial retirement and family security benefits.
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 proceeds.
•The Executive enjoys substantial retirement and family security benefits.
BeneficiariesBeneficiaries
EmployerEmployer ExecutiveExecutive
The Salary Deferral Plan
Pre RetirementCompensation
Post RetirementCompensation
Cash Valueto fund deferred
compensation
Cash Valueto fund deferred
compensation
Tax Freedeath benefitto fund continuingcompensation to heirs
Tax Freedeath benefitto fund continuingcompensation to heirs
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.17
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.18
Supplemental 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”
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.19
How 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
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.20
Executive 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
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.21
Advantages 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
*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 Manulife Financial Representative.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.22
How Does a Bonus Plan Work?
CorporationExecutive
ManulifeFinancialInsurancePolicy
IRS
Bonus premium amount
Pays premium
In retirement, takes withdrawals
Pays tax to IRS on premium
*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 Manulife Financial Representative.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.23
Restrictive 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
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.24
Advantages of a REBA
• Corporation– Distinguished compensation package– Minimal set-up cost– “Golden handcuffs”
• Executive– Portable death benefit– Supplemental retirement income
*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 Manulife Financial Representative.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.25
REBA 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
*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 Manulife Financial Representative.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.26
Split Dollar Arrangements
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Advantages of Split Dollar Plans
• Corporation– Death benefit protection– Access to cash values– Selective– Simple to implement
• Executive– Death benefit protection– Protects insurability
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.28
How 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
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.29
• 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 the employer providing benefit, or a Non-Owner Employee.
Endorsement Method
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Relative Premiums
Policy Premium SplitPolicy Premium Split
Endorsement Method
Corporate
Executive
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Policy Proceeds SplitPolicy Proceeds Split
Endorsement Method
Total Death Benefit
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Executive Death Benefit
Corporate Return of Premium
Excess Corporate Cash Value
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• 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
Collateral Assignment Method
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.33
Policy Cash Value SplitPolicy Cash Value SplitTotal Cash Value
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Balance to Executive
Employer Return of Premium
Collateral Assignment Method
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.34
Policy Proceeds SplitPolicy Proceeds Split
Total Death Benefit
$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
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Balance to Executive’s Beneficiary
Corporate Return of Premium
Collateral Assignment Method
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.35
Split Dollar SummarySplit Dollar Summary
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Buy-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
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.37
Types of Buy-Sell Arrangements
• Stock Redemption or Entity Purchase
• Cross Purchase• Wait and See
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.38
• 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.
Stock Redemption or Entity Plan
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.39
Pays Premiums
Agreement Agreement
During Lifetime
Owner A Owner B
The Business owns insurance policies on each owner
Business
Stock Redemption or Entity Plan
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.40
Business
Owner B
Pays Death Benefit
CashBusinessInterest
Upon A’s Death
Stock Passes
A’s Family or Estate
Stock Redemption or Entity Plan
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.41
Cross-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
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.42
Cross Purchase Plan
During Lifetime
Each Owner Obtains Insurance On the Other
Pays Premiums Pays Premiums
Business
Owner A Owner B
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.43
Advantages 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.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.44
Pays Death BenefitStock Passes
Cash
A’s Family or Estate
Business
Business Interest
Upon A’s Death
Cross Purchase Plan
Owner B
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.45
Wait and See Arrangement
• 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
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.46
During Lifetime
Each Owner Obtains Insurance On the Other
Pays Premiums Pays Premiums
Business
AgreementAgreement
“Wait and See” funded by owners
Owner A Owner B
Pays Premiums
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“Wait and See” funded by owners
Upon A’s Death
Owner B
Stock Passes
Death Benefit
Option toPurchase
2nd
Option toPurchase
MustPurchase
3rd1st $
$
$
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.48
MLI SolutionsSM Business Planning Series
Simple Solutions to Complex Business Planning Problems
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.49
What is the MLI SolutionsSM
Business Planning Series?
• A state-of-the art business planning software system
• Makes the most difficult case easy-to-understand• Has cutting edge composite capability• One of the most advanced systems on the market
today• Launched in August 2000
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.50
What is it?
• Works hand-in-hand with the Manulife Illustration system
• Allows comparisons between concepts• Makes running a complex case a walk in
the park
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.51
The Business Planning Series
• REBA• Executive Bonus Plans• SERP Swaps• SERPs/Deferred Income Plans• Buy-Sell Agreements
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.52
For More Information
Call the Advanced Markets Group at 888-266-7498
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.53
Business Planning Using Life Insurance
Manulife Financial and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Company and are used by it and its affiliates including Manulife Financial Corporation. This material is for informational purposes only. For more detailed information please contact your advisor. Manulife Financial or any of its agents, employees, or registered representatives do not give legal, tax, investment, or accounting advice. The information given here is merely a summary of our understanding of the current laws and regulations. Prospective purchasers should consult their tax advisor.
The End