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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.

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Presentation on theme: "FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 1 Business Planning Using Life Insurance Retain, Recruit, and Reward Manulife Financial and the block design."— Presentation transcript:

1 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 Company and are used by it and its affiliates including Manulife Financial Corporation. Copyright The Manufacturers Life Insurance Company (U.S.A.) All rights reserved. MLI Expires 12/31/2002. THIS MATERIAL MAY NOT BE COPIED OR USED WITH THE PUBLIC.

2 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.

3 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

4 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.

5 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.

6 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 Business Manulife Financial Insurance Policy

7 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 7 Non-Qualified Executive Benefit Plans

8 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 8 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

9 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 9 Types of Non-Qualified Deferred Compensation Plans Employee Financed Employer/Employee Financed Employer Financed Group Plans

10 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 10 Employee Benefit Limits for 2002

11 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 11 Reverse Discrimination

12 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 12 The Power of Deferred Compensation 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.

13 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

14 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

15 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 15 Power of Salary Deferrals 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 $ and non-deferred is $137,849.

16 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 16 The 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 Executive Agreement to use deferral to purchase life insurance policy Agreement to defer a specified amount of income Employer purchases and owns the policy Employer

17 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 17 The Structure Notes: The Employer is able to provide significant pre and post retirement benefits on a deferred basis. The Employers 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 Employers 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. Beneficiaries Employer Executive The Salary Deferral Plan Pre Retirement Compensation Post Retirement Compensation Cash Value to fund deferred compensation Cash Value to fund deferred compensation Tax Free death benefit to fund continuing compensation to heirs Tax Free death benefit to fund continuing compensation to heirs FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 17

18 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

19 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

20 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

21 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.

22 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 22 How Does a Bonus Plan Work? Corporation Executive Manulife Financial Insurance Policy 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.

23 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

24 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.

25 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.

26 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 26 Split Dollar Arrangements

27 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 27 Advantages of Split Dollar Plans Corporation –Death benefit protection –Access to cash values –Selective –Simple to implement Executive –Death benefit protection –Protects insurability

28 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

29 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

30 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 30 Policy Premium Split Endorsement Method Corporate Executive

31 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 31 Policy Proceeds Split Endorsement Method Executive Death Benefit Corporate Return of Premium Excess Corporate Cash Value

32 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 32 In most cases its the customary method used to remove proceeds from majority shareholders 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

33 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 33 Policy Cash Value Split Balance to Executive Employer Return of Premium Collateral Assignment Method

34 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 34 Policy Proceeds Split Balance to Executives Beneficiary Corporate Return of Premium Collateral Assignment Method

35 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 35 Split Dollar Summary

36 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 36 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

37 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 37 Types of Buy-Sell Arrangements Stock Redemption or Entity Purchase Cross Purchase Wait and See

38 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

39 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 39 Pays Premiums Agreement During Lifetime Owner AOwner B The Business owns insurance policies on each owner Business Stock Redemption or Entity Plan

40 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 40 Business Owner B Pays Death Benefit Cash Business Interest Upon As Death Stock Passes As Family or Estate Stock Redemption or Entity Plan

41 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 41 Cross-Purchase Plan Owners take life insurance policies out on each other Survivor purchases deceased owners shares in company Life insurance proceeds help to provide the funds

42 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 42 Cross Purchase Plan During Lifetime Each Owner Obtains Insurance On the Other Pays Premiums Business Owner AOwner B

43 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.

44 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 44 Pays Death Benefit Stock Passes Cash As Family or Estate Business Business Interest Upon As Death Cross Purchase Plan Owner B

45 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

46 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 46 During Lifetime Each Owner Obtains Insurance On the Other Pays Premiums Business Agreement Wait and See funded by owners Owner AOwner B Pays Premiums

47 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 47 Wait and See funded by owners Upon As Death Owner B Stock Passes Death Benefit Option to Purchase 2nd Option to Purchase Must Purchase 3rd1st $ $ $

48 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 48 MLI Solutions SM Business Planning Series Simple Solutions to Complex Business Planning Problems

49 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 49 What is the MLI Solutions SM 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

50 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

51 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

52 FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 52 For More Information Call the Advanced Markets Group at

53 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


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