Complexity of Advanced Sales
Financial Underwriting
You Want How Much?
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Underwriting Humor
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Underwriting Humor
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Underwriting Humor
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Marketing
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Innovative Products and Solutions
Enabling clients to arrive safely at their destination
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Innovation
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Why Life Insurance?
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Life Insurance
• A life insurance policy is a contract with an insurance company.
• In exchange for premiums (payments), the insurance company
provides a lump-sum payment, known as a death benefit, to
beneficiaries in the event of the insured's death.
• Typically, life insurance is chosen based on the needs and goals
of the owner.
• Term life insurance generally provides protection for a set period of
time.
• Permanent insurance, such as whole and universal life, provides
lifetime coverage.
• It is important to note that death benefits from all types of life
insurance are generally income tax-free.
Access - Relationships - Professionalism
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A Few Key Ingredients
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Term Insurance
Income Replacement
Designed for a certain time 10,15,20,30 years
Fixed Price for time period
• Universal Life
• Wealth Transfer, Income Protection, and some design focus on Taxdeferred wealth accumulation
• Flexibility, in general for life
• Flexible premiums
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Whole Life
Wealth Transfer preservation and Tax-deferred wealth accumulation
For Life
Typically Fixed
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What Kind of Coverage?
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Life Products Advancing
• Income for Life
– Tax Free Income for Life
• Riders
– LTC
– DI
– CI
– TI
• Accelerated Benefits Riders
– Chronic, Critical, Terminal Illness
• Balance Benefit Rider
– Increases the first year Cash Value in a policy
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LTC and ABR
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The New Life Insurance
• The Life Insurance you do not have to die to use
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One Stop Shop
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Advanced Sales
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Business Coverage
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Keyman
Buy Sell
Loans Debt – collateral assignment
Pensions
Business Succession/Continuation
Executive Benefits
– Bonus Plan
– Split Dollar Arrangement
– Executive Compensation
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Free Vacation
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Qualified and Non-Qualified
Employee Benefit Programs
• Equity Split Dollar plans, which use corporate dollars for
personal insurance
• Section 79 and 412(e)(3)
• Executive Bonus plans, which are fully tax deductible to
the employer and totally selective in participation
• Deferred Compensation plans, which provide maximum
corporate flexibility and control
• Salary Continuation plans, which provide maximum
security for key executives
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Advanced Sales
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162 Bonus Plan – Executive benefit
Split Dollar Plan
A Non-Qualified Deferred Compensation
Premium Finance
Section 79
Pension
Captive Insurance
Kia-zen
Private Placement Insurance
Personal Holding Companies
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Advanced Sales
• Charitable Giving
– What is reasonable?
– What value to do you give?
• Business Coverage
• Buy/Sell
• Keyman
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Getting Ahead
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Nonqualified Plans
• Section 409A or nonqualified deferred
compensation
• Compensation that workers earn in one year,
but is paid in a future year.
• This is different from deferred compensation in
the form of elective deferrals to qualified plans
(such as a 401(k) plan) or to a 403(b) or 457(b)
plan.
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Nonqualified Plans
• There are two ways for an employer to handle
the liability under an NQDC
• plan: 1) purchase taxable investments (e.g.,
stocks, bonds and mutual funds)
• Plan: 2) purchase permanent life insurance on
the employee's life
• *In either case, the assets are the property of the
employer and subject to the claims of the
employer's creditors
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Pension
• Also known as qualified pensions
• Umbrella term for a number of retirement plans that
allow contributions to be tax deducted but not included in
the participants gross income.
• Assets grow in the plan on a tax deferred basis.
• Distributions are received as ordinary income.
• These are all ERISA plans and have strict vesting,
participation, contribution, administration rules.
• More generally, these are characterized as defined
contribution plans and defined benefit plans.
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An Executive Bonus Plan
• Referred to as a Section 162 plan
• Allows an employer to provide personally owned life insurance as a
fringe benefit for owners and select key employees.
• The employer chooses which employees it would like to include in
the plan and how much of a bonus (or how much life insurance)
each employee will receive.
• Participating employees apply for and own a life insurance policy on
their life and name the beneficiary.
• The business pays the premiums and reports the amount paid as
bonused compensation to the employee.
• As long as total compensation to the employee is reasonable, the
premiums paid are tax-deductible to the business.
• The employee reports the bonused premium amount as taxable
income, the employer may provide additional amounts (a double
bonus) to the employee to offset the tax amount due.
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Executive Bonus Plan
(Section 162) IRS Tax Code
• An executive bonus plan provides for the purchase of tax-deductible
life insurance for selected key employees.
• You can purchase life insurance with tax-deductible corporate
dollars for personal needs:
– Family income
– Home assurance
– Educational fund
– Estate liquidity
• This enables you to recognize key employees through an
arrangement where the company bonuses the premium for life
insurance
– The bonus is taxable to the insured who reaps all the benefits to
the coverage and it is fully deductible to the company
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162 Executive Bonus Plan
Advantages of The Executive Bonus Plan
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No approval by the Internal Revenue Service is required.
The employer may select the employees to be covered.
Amounts of the coverage are set entirely by the employer.
No maximum of minimum number of lives must be covered.
The employer has discretion to continue or discontinue the plan at
any time.
All employer cost of the plan are tax-deductible business expense.
All elements of the insurance policy are owned by the employee.
Mutual policy dividends can be used by the employee to offset the
tax cost of employer premium payments.
Cash values may be borrowed by the employee without either
disqualifying the plan or incurring tax liabilities. However, interest
payments on borrowed cash values will not be tax-deductible.
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162 Executive Bonus Plan
How does it work?
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Split Dollar
• Split dollar is a funding arrangement between two
parties:
– premiums for a permanent cash value life insurance
policy are paid by one entity / person
– In exchange for sharing the policy proceeds.
• Typically, the cash value or a portion of the death benefit
is used to reimburse the premium paying party for its
costs.
• The split dollar arrangement may take the form of an
economic benefit arrangement or a loan arrangement.
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Who can set up a split dollar plan?
• There are a variety of business or personal situations
where a split dollar plan can work.
• Family members: parents or grandparents help a child
or grandchild obtain needed life insurance protection.
• Business owners and key employee: business owner
uses business dollars to help key employee fund the
cost of a buy-out plan.
• Corporation and trust: business owner or professional
wants to create estate liquidity by having their business
or professional practice fund the policy.
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The Kai-Zen Plan
• Is a form of premium financing designed for
S162 executive bonus plans that is jointly funded
by the client and by bank financing.
• The bank financing provides approximately 6075% of the total contribution to the plan.
• The Kai-Zen Plan is designed for businesses,
owners, executives, professionals, doctors,
attorneys or similar key employees.
• “Golden Handcuffs”
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Section 79
• It is a way to provide term life insurance to groups of employees
• Section 79 part A
– Typical plan offers up to $50,000 of term life insurance to
employees
• Section 79 part B
– Employees elect a factor X of income of term life insurance
• Section 79 part C
– Allows for permanent benefits to be provided as well, thus
allowing the plan to be funded with cash value life insurance
• When the permanent benefit is elected, the employee includes only
a portion of each premium in income
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The Income Tax “S79” Advantage
• For the Employer:
• Contributions to the plan are tax-deductible, assuming they
constitute “reasonable compensation”
• For the Employee:
• Employees’ beneficiaries receive life insurance proceeds Income
tax-free
• Employees can receive up to $50,000 of life insurance income &
tax-free
• When permanent life insurance is elected, Employees include only
a portion of each premium in income
• Life insurance cash values accumulate tax-deferred.
• Once the plan is terminated, insurance policy loans and
withdrawals can provide tax-free income, as long as the contract
is kept in force and withdrawals do not exceed cost basis
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What does it mean?
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Premium Finance
• Is a valuable tool for wealthy individuals who
need life insurance but don’t want to tie up
capital.
• It’s a method for paying for life insurance using
bank financing and involves collateral – cash
value and client assets.
• Investors are looking for arbitrage.
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Essence of Arbitrage
• Pure arbitrage, where, in fact, you risk nothing and earn
more than the riskless rate.
• Near arbitrage, where you have assets that have
identical or almost identical cash flows, trading at
different prices, but there is no guarantee that the prices
will converge and there exist significant constraints on
the investors forcing convergence.
• Speculative arbitrage, which may not really be
arbitrage in the first place.
– Investors take advantage of what they see as
mispriced and similar (though not identical) assets,
buying the cheaper one and selling the more
expensive one.
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Private Placement Insurance
• Usually a variable life policy where the separate
accounts are hedge funds.
• These are generally only available to qualified
buyers and the premium payments and death
benefits are often very large.
• Typically individuals must be able to qualify for
Hedge Funds - Mega Wealthy
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Private Placement Insurance
• Net worth of more than $1 million, owned alone or jointly
with a spouse
• Has earned $200,000 in each of the past two years
• Has earned $300,000 in each of the past two years
when combined with a spouse
• Has a reasonable expectation of making the same
amount in the future
• For investment institutions, such as pensions,
endowments, and trusts, the primary qualification is
having $5 million in assets.
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Private Placement Insurance
• Many hedge funds set a more stringent standard than the SEC,
asking that investors be qualified purchasers under their own
internal guidelines.
• Typically, qualified purchasers are individuals with at least $5 million
in investable assets. Trusts, endowments, and pensions must have
at least $25 million in investable assets.
• Minimum-investment standards for limited partners may demand
that its new investors put in at least $1 million or $5 million, which
eliminates a novice investor who has most of her wealth in her
house and her IRA account.
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Personal Holding Companies
• Is a corporate entity that derives a significant
percentage of its income from passive income
(such as interest, dividends, distributions).
• The tax on the corporation is at corporate tax
rates plus a 15% penalty tax on undistributed
income. (Non – Deductible)
• *60% passive income
– if owned by 5 or fewer people
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Charitable Donations
Life insurance donations and their advantages
• Tax deductions
• Leveraging assets
• Gifting a policy outright
• Naming a charity as beneficiary
• Donating the dividends
• Giving to a charity with life insurance is an excellent
means to provide the charity of their choice with a large
sum of money that can provide a lasting legacy for a
cause that you believe in
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Policy Donations
• Gifting a life insurance policy can greatly reduce
the donor’s taxable estate.
• Gifting a policy can also yield a current income
tax deduction of the policy’s fair market value.
• Gifting an unwanted policy that was originally
purchase to cover a need that no longer exists.
• The charity will receive the entire face amount of
the policy upon the death of the insured.
• Premiums paid after the date of the gift will be
deductible as well.
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Naming a Charity as Beneficiary
• Naming the charity as the beneficiary does not offer the
income tax advantages that come with gifting a policy.
• Donors who are unsure of exactly how they want to
apportion their assets after death can list a charity as a
revocable beneficiary
• Transfer of assets from an insurance contract is also
absolutely incontestable, thus rendering anyone
contesting the estate settlement powerless to stop it.
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Charitable Giving
• Gifting Policy Dividends
– It is possible for policyholders to receive the
dividends paid to their life insurance policies
in cash and donate them to charity. The
dividends donated are deductible in the same
manner as premiums paid on a gifted policy
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Charitable Giving
• What is reasonable?
• What value do you give?
– Tangible or Intangible
• There is also no limit on the size of the policy
that may be donated, since charitable donations
have no ceiling for estate tax purposes.
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Financials
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Annual Income Growth Rate
• For all US households for the 25-year period 1980-2005
was 2.70% after adjusting for inflation.
• A realistic range of long term real income growth is from
a low of 1.5% to a high of 6.5% per year.
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Income Replacement
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30 year old x 40 times salary
40 year old x 35 times salary
50 year old x 25 times salary
60 year old x 15 times salary
65 year old x 10 times salary
66+ year old x 5 times salary
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Net Worth
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Estate Tax Needs
$5,000,000, the exemption for 2011
$5,120,000, in 2012
$5,250,000, in 2013
$5,340,000, in 2014.
The exemption will continue to be indexed for
inflation in 2015 and later years.
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Net Worth
• $5,500,000 net estate
• $5,000,000 in 2011
= $500,000 taxable estate
$500,000 taxable estate x 40% rate =
$20,000 tax liability
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Future Value of the Investment
• F = P*(1 + r)n
• The future value of the investment (F) is equal to the
present value (P) multiplied by 1 plus the rate times the
time.
• Bob invests $1000 today (P) and an interest rate of 5%
(r). After 10 years (n), his investment will be worth:
• F = 1000*(1+.05)10 = 1,628.89
• Make sure to convert the interest rate from a percentage
(like 8%) to a decimal (like .08)
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Financials
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Business Needs Coverage
• Keyman = 10x Salary
• Buy Sell – Asset Valuations: Calculates the value of all of the assets of a
business and arrives at the appropriate price.
– Liquidation Value: Determines the value of the company's
assets if it were forced to sell all of them in a short period of time
(usually less than 12 months).
– Income Capitalization: Future income is calculated based upon
historical data and a variety of assumptions.
– Income Multiple: The net income (profit/owner's benefit/seller's
cash flow) of a business is subject to a certain multiple to arrive
at a selling price.
– Rules Of Thumb: The selling price of other "like" businesses is
used as a multiple of cash flow or a percentage of revenue.
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Human Value
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Take Away
• Consider the Human Value
Calculation
• Ultimate Total Line on a person’s life
• Include all the previous needs
• Does it make sense?
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Looking at it Differently
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Suitability and Fiduciary-Duty
• Just because an agent sold a life policy, does it
make it a suitable sale?
• Is it in the client’s best interest?
• There's a large difference between the suitability
and fiduciary-duty standards.
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Questions
Mental Break Time.
This is your last quiz of the night.
You deserve an easy Question?
What is 1 + 1 ?
A.
B.
C.
D.
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Not this one
Still not this one
2
You’ve gone too far, go back to C.
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Credits
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