1. Policies issued by American General Life Insurance Company ("AGL“)
Executive Bonus Basics
Presented by…
Policies issued by American General Life Insurance Company ("AGL“)

2. Disclaimer
The information presented herein is not a comprehensive analysis of the topic presented, and the viewer should consult tax and legal advisors to understand all the ramifications of the topics discussed.
This information is general in nature and may be subject to change. The Company, its financial professionals and other representatives are not authorized to give legal, tax or accounting advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your situation, consult your professional attorney, tax advisor or accountant.
To ensure compliance with requirements imposed by U.S. Treasury Regulations, we inform you that any tax advice contained in this presentation (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
This Disclaimer should be read to the audience to ensure its understanding of the IRS Circular 230 requirements and to emphasize that American General Life Insurance Company (“American General Life”) is a product provider only. The presentation provided is for educational purposes only and American General does not endorse or promote the concept presented. The concept presented is made available for the purpose of informing American General’s appointed agents that such concepts exist and that clients who may be interested in investigating such concepts seek the counsel and services of their independently retained experts and advisors on such matters.
FOR AGENT USE ONLY - NOT FOR DISSEMINATION TO THE PUBLIC

3. Employer Challenges Attracting Top Employees
Retaining and Rewarding Top Employees
Tax Efficient Plan

4. Employee Challenges
Family Income Protection
Retirement

5. Executive Bonus Plans Why “Employee” Owned
Tax-deferred accumulation
Tax-preferred distributions
Income tax-free death benefit
No income limits on participation

6. Executive Bonus Requirements for Plan to Qualify
Employer may NOT be beneficiary
Total salary and bonus must represent “reasonable compensation”
Bonus to pay premium is ordinary and necessary business expense
Employer must pay FICA and Medicare taxes on bonused amounts

7. Executive Benefit Plans
Executive Bonus
Simplest
of the
Executive Benefit Plans

8. Bonus/Loan for Income Taxes
Executive Bonus
Employer
Employee
Reportable Income
Bonus/Loan for Income Taxes
Policy Ownership
Cash Value (unless restricted)
Death Benefit
Premium Payment
The employee usually applies for and owns the policy, naming someone other than the employer as beneficiary. The cash bonus or premium is declared as additional compensation on the employee’s W-2. The annual taxes on this bonus are, in some cases, funded by an additional cash bonus to the employee, known as a double bonus. Eventually, the policy’s annual cash value increase will exceed the tax on the bonus and may be borrowed or withdrawn to pay taxes. Policy loans or withdrawals will, of course, reduce the death benefit and may have tax consequences.
The employer should be able to deduct the bonuses to pay premiums as an “ordinary and necessary” business expense under Internal Revenue Code (“IRC”) § 162, assuming the employee’s compensation is reasonable. These employer bonuses are wages and therefore subject to FICA and FUTA withholding. As with other life insurance, the death proceeds usually will be received income tax-free by the employee’s personal beneficiary under IRC Sec. 101(a).

9. Benefits to the Employer
Salary or bonus used to pay premiums represents an ordinary and necessary business expense of the employer, and, to the extent compensation is “reasonable” in the aggregate, is tax-deductible under Section 162.
The arrangement does not have to be prequalified by the IRS, nor is it subject to annual reporting and disclosure rules.
There are no annual administrative costs.
The employer may freely select the employee(s) it wishes to benefit and vary the benefit among the participating employees.

10. Benefits to the Employee
Employee owns the policy, so it is portable if he or she terminates employment.
The death benefit is income-tax-free.
The employee’s income tax liability for additional compensation can be met by borrowing or withdrawing policy cash values (with a reduction in death benefit and possible tax consequences) or receiving an additional bonus from the employer.
The employee can use the cash value of the policy to, among other things, supplement retirement income (with a reduction in death benefit and possible tax consequences).

11. efficient, cost effective
Executive Bonus
efficient, cost effective
Meet family financial needs
Protect survivors
Ensure a legacy

12. Executive Bonus Ask a business owner about… Rewarding key employees?
Ability to select whom they reward with no discrimination rules?
A plan where all contributions could be tax deductible?
Adding bells and whistles to their employee’s retirement plans?
Giving protection to employee’s family in exchange for his/her loyalty to the company?

13. Executive Bonus - Opportunities
Any closely held business with key employees;
Family businesses or sole proprietorships with
family members as employees;
Companies wishing to find a replacement for
qualified plan benefits;
Providing a premium source to fund a cross
purchase buy-sell between shareholders.
Small businesses where qualified plans are too expensive;
Group term carve-out opportunities where additional insurance benefits are provided to a select group of employees “carved out” of a group term plan;
Companies in a higher tax bracket than the employees where the combined tax paid can be reduced;

14. Executive Bonus - Opportunities
Almost any type of life insurance policy can be used. However, selecting a product with excellent cash value growth potential combined with preferred policy loans can prove superior for supplemental income and death benefit coverage.

15. Executive Bonus - Prospects
Age: Pre-Retirement Income: Highly Compensated Status in Company: Experience that cannot be replaced.
Chief Executive Officer Chief Financial Officer
Chief Marketing Officer President
Executive Vice President Member of the Board of Directors
Senior Vice President Highly Compensated Sales People

16. Executive Bonus Structures & Variations

17. Executive Bonus Basics
Single Bonus
Employer pays annual premium
Employee cost — Tax on Bonus
Example:
Employer pays $10,000 Premium
Employee cost – tax on $10, ($10,000 x 0.30 = $3,000)

18. Executive Bonus Basics
Double Bonus
Employer covers annual premium plus tax on
bonus
Employee cost – zero out of pocket
Example:
Employer pays $10,000 premium + additional cash to
pay tax
“Grossed up bonus” to Executive = $14,286
Bonus amount ÷ (1-tax rate)
$10,000 ÷ ( ) =
$10,000 ÷ 0.70 = $14,286

19. Executive Bonus Basics
Bonus Plus
Employer loans an amount sufficient to cover
the income tax associated with the annual
bonus
Employee cost – zero out of pocket
Example:
Employer pays $10,000 premium + loans the employee $4,000/year
(assuming a 40% tax bracket) to pay the income taxes that are due.
Appropriate IRS established interest must be charged for the loan
until it is repaid in full. (If properly structured the cash value can be
used to repay the principal and interest.)

20. Executive Bonus Basics
When Employer Wants More Control:
Consider a “restricted” executive bonus
arrangement
Separate agreement between Employer and
Executive
Limits executive’s access to policy values
Employer can better assure policy values use
as planned
This planning may help retain the executive with
the employer
Control is the key word!

21. Executive Bonus Basics
Restrictive Executive Bonus Arrangement (REBA)
Restricts executive’s use and enjoyment of the
policy’s cash value
Agreement between employer and executive
Employer pays premium
Restrictive endorsement is executed
Limits executive’s rights to cash value
Restrictive endorsement released on occurrence of
triggering event
retirement, disability, age, specific number of years, death, mutual agreement, etc

22. Executive Bonus Arrangement
When does a Restricted Executive Bonus Fit?
Employer wants to control access to policy values
Only want to reward one or just a “few” key executives
Employers that wish to supplement qualified plans
Businesses that wish to provide supplemental benefits but don’t want high and/or continuing administration costs

23. Executive Bonus Issues to consider with any Executive Bonus
Arrangement:
Tax bracket of corporation and executive
Employer desires control of the plan
Use restrictive agreement
Concerns about executive turnover
Look to restrictive plan

24. (Flower Shop Manager, age 50)
Protection Guarantees with Optionality® Executive Bonus Plan Keeps Key Employee -This strategy can utilize any UL product-
Secure Lifetime GUL 3
Theresa would like to reward Kathy for her efforts and encourage her to continue working until her retirement. She also wants this cost to be tax deductible to the company.
Theresa Kelly
(Flower Shop Owner)
Kathy Johnson
(Flower Shop Manager, age 50)
Solution Details
Premiums: $16,814 per year paid for 15 years with company cash bonuses
The business purchases $1M policy with Guaranteed Death Benefit for Kathy’s family
Secure Lifetime GUL 3
The business pays the insurance premium as an Executive Bonus, which is tax-deductible
Additional bonuses are made to Kathy to cover any tax liabilities
Not an actual case. For illustrative purposes only. Quoted values based on female, issue age 50, Standard Nontobacco underwriting class. Quote dated 10/25/2016 for the state of Texas.

25. Executive Bonus Conclusion
Executive Bonus Plans are a VALUABLE tool
in helping:
Employers
Recruit – Reward – Retain
Employees
Save for Retirement
Agents
Provide valuable planning services and get compensated

26. Important Information
The concepts presented herein are for informational purposes only and do
Not constitute a recommendation that they are suitable for a particular individual or
business. Neither American General Life Companies, nor its agents or
representatives, provide legal or tax advice. Any comments about legal or tax
treatment simply reflect the author’s understanding of current interpretations of the
federal tax laws as they relate to the planning technique. No coverage is given to
state tax laws, which must also be considered. Tax laws are also subject to change
in the future. Clients and prospects should consult their own legal and tax advisors
to determine whether the recommended approach is appropriate for their
circumstances.
There are complex legal and tax implications associated with the strategy illustrated
here. The information presented herein is not a comprehensive analysis of the topic
presented. Clients must consult their own tax and/or legal advisors to determine
whether or not any plan or program illustrated is appropriate for them and to
understand all the benefits and risks of any premium financed transaction.
FOR AGENT USE ONLY - NOT FOR DISSEMINATION TO THE PUBLIC

27. Important Information
Policies issued by: American General Life Insurance Company, 2727-A Allen Parkway, Houston, Texas Policy Form Numbers 10460, ICC-10460; Lifestyle Income Rider Form Number 13972; Accidental Death Benefit Rider Form Number 82012; Children’s Insurance Benefit Rider Form Number 82410; Spouse/Other Insured Term Rider Form Number 88390; Terminal Illness Rider Form Number 91401; Waiver of Monthly Deduction Rider Form Number The United States Life Insurance Company in the City of New York, One World Financial Center, 200 Liberty Street, New York, New York, Policy Form Number 10460N; Lifestyle Income Rider 13972N; Accidental Death Benefit Rider Form Number ADB791E; Children’s Insurance Benefit Rider Form Number CI791E1; Waiver of Monthly Deduction Rider Form Number 82001N. The underwriting risks, financial and contractual obligations and support functions associated with the products issued by American General Life Insurance Company (AGL) and The United States Life Insurance Company in the City of New York (US Life) are the issuing insurer’s responsibility. Guarantees are subject to the claims paying ability of the issuing insurance company. American General does not solicit business in the state of New York. Policies and riders not available in all states. American General Life Companies, is the marketing name for a group of affiliated domestic life insurers, including AGL and US Life. These product specifications are not intended to be all-inclusive of product information. State variations may apply. Please refer to the policy for complete details.
AGLC107389
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