Bridging the Gap
Leveraging Life Insurance
in Qualified Plans
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Agenda
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Identify potential clients and concerns
The strategy: qualified plans, life insurance and
tax deductions
A case study
The split-funded plan approach
Exit strategies
Action plan
Please note: This document is designed to provide introductory information on the subject matter. MetLife does not provide tax and legal advice. Clients
should consult their attorney and /or tax advisor before making financial investment or planning decisions.
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Identify Potential Clients
& Concerns
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
The Client
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Older business owner
Few employees
Additional retirement savings needed
Sufficient annual cash flow
Insurable
Possible transfer tax concerns
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
The Concern
In the first few years I reinvested everything back into
the business.
I am now reaping the rewards of that sacrifice, but I am
so far behind in saving for retirement.
I worry I can’t catch up.
Assets are generally intended to
be sheltered from inclusion in a
grantor’s estate
May be used to purchase & own
single life or survivorship coverage
Note: IDIT may be attacked by IRS. Clients should speak with their own legal and tax advisor regarding further details.
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
The Planning Gap
In 2014, the maximum 401(k) contribution is $17,500. A business owner with a salary of $300,000 would
defer only 5.6% of his or her salary. (i.e. $17,000/$300,000=5.83%) They would experience a retirement
gap of around $30,000.
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Additional Concerns for Business Owners
• How can I generate larger tax deductions for the
business?
• Can I protect my business assets from creditors?
• What will my business be worth when I retire?
• Will my business have to be sold to pay estate taxes?
• How do I provide equal inheritances to my children if
they have different levels of interest in the business?
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
The Strategy:
Qualified Plans, Life Insurance
and Tax Deductions
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Defined Benefit Plans
• Predetermined benefit at retirement
• Contributions vary based on performance
• Potential for very large contributions
• Contributions are tax-deductible to the business
• Investment risk is assumed by employer
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Consider Life Insurance In a
Retirement Plan
• Leverage pre-tax funds to close the retirement gap
• Tax deductions
• Self-completing
• Estate planning
• Substitute business value
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
How Much Can Be Deducted?
Answer:
It Depends. The purpose of life insurance must remain
secondary or “incidental” to the ultimate goal of the
plan- retirement income.
What does this mean?
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
What are the Incidental Limits?
Defined Contribution
Defined Benefit
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Less Than Percentage Tests
– Whole Life: Less than 50% of
total employer contributions
– Universal or Term: Less than
25% of total employer
contributions
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Seasoned Money
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Seeded Money
100 Times Rule
– Insured’s death benefit may not exceed
100x expected monthly benefit amount
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Revenue Ruling 74-307 (may allow
greater life insurance allocation)
– DB plan treated as a hypothetical DC
plan for purposes of incidental rules
– An actuary determines hypothetical
individual level premium contribution
for each participant
– “Less than 50% or 25%" limits are
then applied against hypothetical
contribution amount for each participant
Please Note: In addition, a contract on a participant's life must be converted to cash or an annuity or distributed to a participant at retirement.
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Case Study
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Case Study
Tom, Dentist
Profile
• Age 50 (standard
nonsmoker)
• Married with children
• 15 years until retirement
• 35% tax bracket
• Significant and steady
annual cash flow
• Few employees
Concerns
• Retirement income
• Wants greater income
tax deductions
• Seeking strategy to
replace lost business
value at retirement
• Need for additional
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
estate liquidity
Evaluating the Proposed Strategy
Three most important questions
1. What are the annual “out of pocket” costs?
2. If Tom dies before retiring, how much of the policy’s
death benefit will remain tax-free?
3. What is the tax impact if the policy is distributed to
Tom at retirement?
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Pre-Retirement Tax Costs $1 million policy
Employee After Tax Out of Pocket Cost
This example is hypothetical. Actual results will vary.
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Income Tax Free Death Benefit By Year
Retirement
For Illustrative Purposes Only.
MetLife Promise Whole Life 120
Age 50 Standard
$20,430 annual premium-Guaranteed
This example is for illustration purposes only. Please see full personalized illustration for additional details.
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
At Retirement – Age 65
$275,000 Fair market value of the policy
$ 78,251 Cumulative taxable insurance costs
$196,749
Actual Taxes Paid: $68,862
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Summation - Putting the Pieces Together
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
The Split-Fund Plan
Approach
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
The Split-Funded Plan Approach
• Benefits funded through a combination of insurance
contracts and investments
• May provide for additional contributions to owners
while meeting IRS coverage tests
• Often used in combination with a profit sharing plan
*
**
MetLife. Quick Facts: Full Year 2009
Based on life insurance in-force as of December 31, 2008.
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Case Study
Richard and Jane, Business Owners
Owners
• Richard, age 52
• Jane, age 52
• Both active in the business
Existing Profit Sharing Plan
• Maximizes contributions, $52,000
in 2014
Goal
• Increase overall deductions
• Minimize funding costs for employees
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Case Study
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Case Study
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Case Study
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Case Study
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Exit Strategies
To ensure the best outcome for the participant, a
well-designed exit strategy is essential.
Why?
When?
Tax Impact?
Planning Objective?
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Exit Strategy Options
1.
Liquidation
2.
Rollout/distribution
3.
Sell the policy to the participant
4.
Sell the policy to a Grantor Trust
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Exit Strategy #1
Liquidation of the Policy within the Plan
Qualified
Plan
Surrender Policy
Cash Surrender Value
Considerations:
1) No tax implications to participant
2) Meets income objective of the plan
3) Participant loses life insurance coverage
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Insurance
Company
Exit Strategy #2
Distribution of the Policy from the Plan
Policy
Qualified
Plan
Participant
Gift of Policy
ILIT
Considerations:
1) Reduces retirement income from plan
2) Fair market value
3) 10% premature distribution penalty prior to age 59 ½
4) Transfer tax implications
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Exit Strategy #3
Sell the Policy to the Participant
Policy
Qualified
Plan
Participant
FMV Purchase
Gift of Policy
ILIT
Considerations:
1) No 10% penalty
2) Meets income objective of the plan
3) Fair market value - No Cumulative Reportable Economic Benefit (CREB)
4) Transfer tax implications
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Exit Strategy #4
Sell the Policy to a Grantor Trust
Qualified
Plan
Participant
Policy
Gift of Policy
Purchase
Policy for FMV
ILIT
Considerations:
1) No 10% penalty
2) Meets income objective of the plan
3) Fair market value (no CREB offset)
4) Transfer tax implications
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Action Plan
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
The Value of Working with a TPA
Benefits for The Trustee
Benefits for the Producer
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Actuarial administration and
plan valuation
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Legal and compliance oversight
ensures tax code validity
Enables you to enter business
owner market with no financial or
administrative overhead
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Consultant role with clients, attorneys
and CPAs
Full Third Party Administration
services including
documentation and
implementation
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May help you increase case size
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Employee statements and
communication
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Creating proposals and census
administration
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Implementing Life Insurance in
Qualified Plans
1.
Identify and qualify clients
2.
Schedule time for client meetings and discuss
approach
3.
Formalize goals, contribution abilities, employee
census and insurability to determine appropriate
plan type
4.
Work with third party administrator to establish the
plan
5.
Apply for insurance contracts and determine other
investments
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
The MetLife Brand
• One of America’s largest financial
companies with roots as far back as 1863
• Serves over 90 of the top one hundred FORTUNE
500® companies*
• Recognized as the Nation’s Largest
Life Insurer**
* MetLife
Worldwide corporate profile 2011
**Based on life insurance in force. Metlife 2011
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Important Information
Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this
document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the
promotion and marketing of insurance products. Your clients should seek advice based on their particular circumstances
from an independent tax advisor.
MetLife, its agents and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for
general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and
legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and
circumstances. You clients should consult with and rely on their own independent legal and tax advisers regarding their particular set of
facts and circumstances.
Prospectuses for Equity Advantage Variable Universal Life, and for the investment portfolios offered thereunder, are
available from MetLife. The policy prospectus contains information about the policies features, risks, charges and
expenses. Investors should consider the investment objectives, contract features, risks, charges and expenses of the
investment company carefully before investing. The investment objectives, risks and policies of the investment options,
as well as other information about the investment options, are described in their respective prospectuses. Clients should
read the prospectuses and consider this information carefully before investing. Product availability and features may
vary by state.
MetLife life insurance policies have limitations, exclusions, charges, termination provisions and terms for keeping them in force. There is no
guarantee that any of the variable investment options in this product will meet its stated goals or objectives. The cash value is subject to
market fluctuations so that, when withdrawn, it may be worth more or less than its original value. Guarantees are based on the claims
paying ability and financial strength of the issuing insurance company.
Life insurance products are issued by MetLife Investors USA Insurance Company and in New York only, by Metropolitan Life Insurance
Company. All guarantees are based on the claims-paying ability and financial strength of the issuing insurance company. Variable products
are distributed by MetLife Investors Distribution Company (MetLife Investors), Charlotte, NC. May 2014
Insurance Products are:
• Not A Deposit • Not FDIC-Insured • Not Insured By Any Federal Government Agency
• Not Guaranteed By Any Bank Or Credit Union • May Go Down In Value
BDVL23818 L0514374418[0515]
© 2014 METLIFE INC. PEANUTS © 2014 Peanuts Worldwide
For Producer or Broker/Dealer Use Only. Not for Public Distribution.