Complexity of Advanced Sales Financial Underwriting

1. Complexity of Advanced Sales Financial Underwriting You Want How Much?

2. Underwriting Humor

3. Underwriting Humor

4. Underwriting Humor

5. Marketing

6. Innovative Products and Solutions Enabling clients to arrive safely at their destination Living Benefits Paycheck for Life Breadth of Portfolio Innovation

7. Innovation

8. Why Life Insurance?

9. 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

10. A Few Key Ingredients • 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 Tax-deferred wealth accumulation • Flexibility, in general for life • Flexible premiums • Whole Life • Wealth Transfer preservation and Tax-deferred wealth accumulation • For Life • Typically Fixed

11. What Kind of Coverage?

12. 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

13. LTC and ABR

14. The New Life Insurance • The Life Insurance you do not have to die to use

15. One Stop Shop

16. Advanced Sales

17. Business Coverage • Keyman • Buy Sell • Loans Debt – collateral assignment • Pensions • Business Succession/Continuation • Executive Benefits • Bonus Plan  • Split Dollar Arrangement • Executive Compensation

18. Free Vacation

19. 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

20. Advanced Sales • 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

21. Advanced Sales • Charitable Giving • What is reasonable? • What value to do you give? • Business Coverage • Buy/Sell • Keyman

22. Getting Ahead

23. 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.

24. 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

25. 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.

26. 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.

27. 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

28. 162 Executive Bonus Plan Advantages of The Executive Bonus Plan • 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.

29. 162 Executive Bonus Plan How does it work?

30. 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.

31. 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.

32. 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 60-75% 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”

33. 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

34. 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

35. What does it mean?

36. 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.

37. 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.

38. 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

39. 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.

40. 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.

41. 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

42. 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

43. 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.

44. 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.

45. 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

46. 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.

47. Financials

48. 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.

49. Income Replacement • 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

50. Net Worth • 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.