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Business Planning Using Life Insurance Retain, Recruit and RewardRetain, Recruit and Reward.

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Presentation on theme: "Business Planning Using Life Insurance Retain, Recruit and RewardRetain, Recruit and Reward."— Presentation transcript:

1 Business Planning Using Life Insurance Retain, Recruit and RewardRetain, Recruit and Reward

2 What is Business Insurance? The purchase of life insurance by an employer on the life of an employee 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. 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 2

3 Types of Business Life Insurance Plans Key Person Key Person Executive Bonus / REBAs Executive Bonus / REBAs Deferred Compensation Plan Deferred Compensation Plan Salary Deferral Salary Deferral SERPs SERPs Split Dollar Split Dollar Buy-Sell Arrangements Buy-Sell Arrangements FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 3

4 Key Person Insurance

5 Insurance Policy taken out on the life of a key employee to protect the business in case of sudden death. 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. A key employee is anyone in the business whose loss would affect profits and day-to- day operations. Owner, Partner, or irreplaceable executive Owner, Partner, or irreplaceable executive FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 5

6 Benefits of Key Person Insurance Protects the business from financial loss due to the death of key employee Protects the business from financial loss due to the death of key employee Business may borrow from the policy cash value* Business may borrow from the policy cash value* Death benefit is received by the company directly free from income taxes** 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 FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 6

7 How Does Key Person Insurance Work? Business purchases a life insurance policy on a key employee Business purchases a life insurance policy on a key employee Business is the owner and beneficiary of the policy Business is the owner and beneficiary of the policy Business pays the entire premium. Business pays the entire premium. FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 7 Insurance Policy BusinessEmployee Employee = Insured Business = Owner / Beneficiary Business has on-file a signed 101(j) form by employee

8 Non-Qualified Executive Benefit Plans

9 Non-Qualified Deferred Compensation Arrangements between an employee and executive to provide key executives with additional retirement benefits 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 Selective and does not need to be offered to all employees Used to retain, recruit and reward key employees Used to retain, recruit and reward key employees FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 9

10 Types of Non-Qualified Deferred Compensation Plans FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 10 Employee Financed Employer/Employee Financed Employer Financed Group Plans

11 Employee Benefit Limits for 2015 FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 11 Maximum 401(k) Contributions $18, Defined Benefit Amounts (Section 415) $210, Highly Compensated Employee $120, Defined Contribution Limits $53, Limits on Compensation from Qualified Plans $265,000.00

12 Reverse Discrimination FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 12

13 The Power of Deferred Compensation FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 13 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.

14 Salary Deferral Plans Executives elect to defer part of their salary Executives elect to defer part of their salary Often referred to as 401(k) mirror plans Often referred to as 401(k) mirror plans More flexible than standard Qualified Plans More flexible than standard Qualified Plans Do not have maximum deferral limits Do not have maximum deferral limits May exclude rank and file employees May exclude rank and file employees Executive financed plans Executive financed plans FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 14

15 How Salary Deferral Plans Work Executive elects to defer a certain amount at the beginning of the year Executive elects to defer a certain amount at the beginning of the year The amount is credited to a “phantom” interest bearing account The amount is credited to a “phantom” interest bearing account Will be distributed for a certain period of time – starting at retirement Will be distributed for a certain period of time – starting at retirement FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 15

16 The Power of Salary Deferrals FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 16 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, and non-deferred is $97, Salary Deferral Withdrawals

17 The Salary Deferral Plan – The Concept FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 17 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

18 The Salary Deferral Plan – The Structure FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 18 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

19 Supplemental Executive Retirement Plan (SERP) Employer sponsored non-qualified deferred compensation plan Employer sponsored non-qualified deferred compensation plan Provides retirement benefits to highly compensated executives Provides retirement benefits to highly compensated executives Can be used with qualified plans Can be used with qualified plans Combats “reverse discrimination” Combats “reverse discrimination” FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 19

20 How Does a SERP Work? Corporation and select executives enter into an agreement that pays the executives a certain amount at retirement Corporation and select executives enter into an agreement that pays the executives a certain amount at retirement Can be informally funded with life insurance Can be informally funded with life insurance Employer is the owner and beneficiary of the policy. Employer is the owner and beneficiary of the policy. FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 20

21 Executive Bonus Plans Employer/executive financed plans Employer/executive financed plans An arrangement between the executive and the corporation An arrangement between the executive and the corporation The corporation pays the premium on a life insurance policy on the executive The corporation pays the premium on a life insurance policy on the executive Executive is the owner and beneficiary of the policy. Executive is the owner and beneficiary of the policy. FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 21

22 Advantages of a Bonus Plan Corporation Corporation Simple to install Simple to install No minimum or maximum lives No minimum or maximum lives Employer cost may be tax deductible Employer cost may be tax deductible Executive Executive Death benefit protection Death benefit protection Supplemental retirement income Supplemental retirement income Can access the policy cash value at anytime Can access the policy cash value at anytime FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 22 *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.

23 How Does a Bonus Plan Work? FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 23 *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

24 Restrictive Endorsement Bonus Arrangement (REBA) Employer financed plans Employer financed plans Employer agrees to pay premium of life insurance policy to be owned by the executive Employer agrees to pay premium of life insurance policy to be owned by the executive Executive files a restrictive endorsement with life insurance company Executive files a restrictive endorsement with life insurance company FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 24

25 Advantages of a REBA Corporation Corporation Distinguished compensation package Distinguished compensation package Minimal set-up cost Minimal set-up cost “Golden handcuffs” “Golden handcuffs” Executive Executive Portable death benefit Portable death benefit Supplemental retirement income Supplemental retirement income FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 25 *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.

26 REBA Agreement Prevents the executive from Prevents the executive from Surrendering the cash value Surrendering the cash value Taking loans and withdrawals from the policy Taking loans and withdrawals from the policy Changing ownership Changing ownership Using the policy as collateral Using the policy as collateral Executive Can Executive Can Name the beneficiary Name the beneficiary FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 26 *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.

27 Split Dollar Arrangements

28 Advantages Split Dollar Plans Corporation Corporation Death benefit protection Death benefit protection Access to cash values Access to cash values Selective Selective Simple to implement Simple to implement Executive Executive Death benefit protection Death benefit protection Protects insurability Protects insurability FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 28

29 How Does a Split Dollar Plan Work? Corporation and executive enter into an arrangement Corporation and executive enter into an arrangement The corporation will pay the bulk of the premium The corporation will pay the bulk of the premium The executive pays the economic benefit amount. The executive pays the economic benefit amount. FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 29

30 Endorsement Method Mandatory for plans when the business seeks to recover amount in excess of premium paid, i.e. key person indemnity or deferred compensation. 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 Ideal when control of the plan is to be with employer providing benefit, or a Non-Owner employee FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 30

31 Endorsement Method FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 31 Policy Premium Split

32 Endorsement Method FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 32 Policy Proceeds Split

33 Collateral Assignment Method In most cases it’s the customary method used to remove proceeds from majority shareholder’s estate In most cases it’s the customary method used to remove proceeds from majority shareholder’s estate Debtor-creditor relationship is created Debtor-creditor relationship is created Places effective control in hands of insured/executive Places effective control in hands of insured/executive Ideal when ultimate objective is to provide continuing post-retirement coverage Ideal when ultimate objective is to provide continuing post-retirement coverage FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 33

34 Collateral Assignment Method FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 34 Policy Cash Value Split

35 Collateral Assignment Method FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 35 Policy Proceeds Split

36 Split Dollar Summary

37 Buy-Sell Arrangements

38 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. 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 Transactions occur At death At death At retirement At retirement At disability At disability FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 38

39 Types of Buy-Sell Arrangements Stock Redemption or Entity Purchase Stock Redemption or Entity Purchase Cross Purchase Cross Purchase Wait and See Wait and See FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 39

40 Stock Redemption or Entity Plan The business agrees to buy life insurance on the lives of the owners 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. 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. Business is the owner and beneficiary of the life insurance policy. FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 40

41 Stock Redemption or Entity Plan FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 41 Pays Premiums Agreement During Lifetime The Business owns insurance policies on each owner Insurance Co. Owner AOwner B Business

42 Stock Redemption or Entity Plan FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 42 Business Pays Death Benefit Cash Business Interest Upon A’s Death Stock Passes Owner B A’s Family or Estate Insurance Co.

43 Cross-Purchase Plan Owners take life insurance policies out on each other Owners take life insurance policies out on each other Survivor purchases deceased owner’s shares in company Survivor purchases deceased owner’s shares in company Life insurance proceeds help to provide the funds Life insurance proceeds help to provide the funds FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 43

44 Cross Purchase Plan FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 44 During Lifetime Pays Premiums Business Insurance Co. Owner B Owner A Each Owner Obtains Insurance On the Other

45 Advantages of Cross Purchase Purchasing shareholder will get step-up in cost basis Purchasing shareholder will get step-up in cost basis Life insurance proceeds are income tax free Life insurance proceeds are income tax free Avoids possible treatment of redemption as a dividend. Avoids possible treatment of redemption as a dividend. No AMT or accumulated earnings tax problems No AMT or accumulated earnings tax problems Can reallocate ownership of the surviving owners by purchasing varying amounts of the deceased owner’s shares. Can reallocate ownership of the surviving owners by purchasing varying amounts of the deceased owner’s shares. FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 45

46 Cross Purchase Plan FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 46 Stock Passes Cash A’s Family or Estate Business Business Interest Upon A’s Death Pays Death Benefit Insurance Co. Owner B

47 Wait and See Agreement Owners agree to buy and sell their shares but the price is not determined until death, retirement or disability 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 Owners purchase life insurance on each other Business has right of first refusal, owner second right, and the business must purchase remaining shares Business has right of first refusal, owner second right, and the business must purchase remaining shares FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 47

48 “Wait and See” funded by owners FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 48 During Lifetime Each Owner Obtains Insurance On the Other Pays Premiums Business Agreement Pays Premiums Owner BOwner A Insurance Co.

49 “Wait and See” funded by owners FOR BROKER / DEALER AND FINANCIAL ADVISOR USE ONLY 49 Upon A’s Death Stock Passes Death Benefit Option to Purchase 2nd Option to Purchase Must Purchase 3rd1st $ $ $ Insurance Co. Owner B Business A’s Family or Estate

50 For More Information MVP Financial Services, Inc. MVP Financial Services, Inc. Business Planning Using Life Insurance


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