Post on 26-Mar-2015
transcript
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Help your business owner clients Recruit, Reward and Retain their best employees
Executive Bonus
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Agenda• Identify Potential Clients and Their
Concerns
• What is Executive Bonus and How Does it Work?
• Case Studies and Action Plan
• Consider MetLife for Business Owner Clients
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
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For Producer or Broker/Dealer Use Only. Not for Public Distribution.
• Age: 25-60
• Income: $100,000+ (Typically)
• Successful owner of a small business • Would like to help
supplement key employee’s retirement income and provide death benefit protection
• They may be their own key employee
• Looking for a planthat is easy to administer
Do You Know This Client?
• Wants to improve benefits package for key employees
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The Concern
• I want to provide additional benefits only for the employees I choose.
• I want to control the amount (and conditions upon the receipt) of these benefits.
• I still want a current tax deduction for my business.
additional benefits
control
tax deduction
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• Qualified Retirement Plans (QRPs) discriminate against highly compensated employees, limiting the percentage of income they may be able to contribute.
• QRPs force inclusion of rank and file employees.
• Success of business depends on one or more key employees.
• Need to provide better benefits than competition to recruit, retain and reward executives.
• Want to effect some control over executive with these benefits.
Issues Facing These Clients
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The Executive Bonus Plan
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For Producer or Broker/Dealer Use Only. Not for Public Distribution.
What is an Executive Bonus Plan?Executive Bonus Plans are simple to administer non-qualified plans. They are an innovative way to help Recruit, Reward and Retain key employees – while still generating a current year business tax deduction for the plan contributions.
simple to administer
tax deduction
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Assuming no restrictive endorsement, the executive can access the policy's cash value through withdrawals
and loans. (Loans and withdrawals will decrease
the cash value and death benefit)
In the event of the executive’s death, his/her designated beneficiary will receive the life insurance policy’s death benefit. The death benefit (less any outstanding loan balance) generally is paid to his/her beneficiaries income tax free.
The employer can directly pay the life insurance premiums to the insurance company or indirectly pay premiums via the bonus to the executive. The executive owns the policy and names a beneficiary of his/her choice.
The employer selects the key executive(s) who will participate in the plan and enters into an agreement to purchase a life insurance policy.
Executive access to policy cash value
Life Insurance Premium
Beneficiary
Executive
Employer
Life Insurance Policy
IRS
1
2
4
Bonus Taxable Income
Life Insurance Death Benefit
3
Tax deduction
Tax-favored distributions assume that the life insurance policy is properly structured, is not a Modified Endowment Contract (MEC) and distributions are made up to the cost basis and policy loans thereafter. Should the policy lapse or be surrendered prior to the death of the insured, there may be tax consequences.
Corporate ResolutionHow it Works
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Potential Solutions:Allows the Employer to Discriminate
• Employer has complete discretion over who is in the plan
• Employer can fund the plan generously, up to reasonable compensation guidelines*
• Employer can control when and how bonuses are paid
* Overall compensation must fall within reasonable compensation limits as determined by the Internal Revenue Service.
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Potential Solutions:The Best Possible Staff
• Recruit• Reward• Retain• Retire
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Potential Solutions: Tax Deductions vs. Control
• Golden handcuffs
• Restrictive bonus design
With respect to a § 162 Executive Bonus plan, the employer should consult with and rely on independent legal and tax advisors regarding whether any executive bonus plan may be considered to be a welfare benefit plan under ERISA and if so, what requirements must be met.
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Employee determines policy beneficiaries5
Discuss client’s goals for business1Determine if client has employees they would like
to provide additional benefits for2Determine scope of benefits to be provided
• Amount of bonus • Restrictive or Non-restrictive3Business owner enters into agreement with covered employees4
Initiate underwriting process on employee6
Fund life insurance policy8
Implementing an Executive Bonus Plan
Bonus to employees in form of premiums or cash7
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Case Studies & Action Plan
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For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Case Study: Darlene’s DesignsDarlene’s goals:1. Reward Sam, her website designer,
with additional life insurance for his family in the amount of 10x his pay
2. Help provide Sam with an alternate source of retirement income, if needed
3. Keep Sam from considering a job with one of her competitors
4. Not be forced to provide equal benefits to her other employees
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Potential Solution: Executive Bonus
• Sam purchases a $1 million Universal Life insurance policy.
• Darlene's business pays expected annual premiums of $11,594 for 15 years - this is a taxable bonus to Sam.
• Darlene's business pays ‘double bonus’ of $4,509 to cover Sam's income taxes due on premium bonus (assumes 28% tax bracket for Sam).
*This example is for illustrative purposes only. Figures are based on MetLife's Guarantee Advantage Universal Life, male, age 35 with standard non-smoker health rating. Please see a full product illustration for additional details.
Results:Darlene enters into a restrictive executive bonus agreement with Sam
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Potential Solution: Executive Bonus
*This example is for illustrative purposes only. Figures are based on MetLife's Guarantee Advantage Universal Life, male, age 35 with standard non-smoker health rating. Please see a full product illustration for additional details.
Results (cont’d):• Darlene's business takes income tax
deduction for total bonus of $16,103.• Sam must have Darlene's permission to
access the policy cash values for 10 years.• Sam has unrestricted access to policy cash
values after 10 years.• Upon Sam’s death, his beneficiaries receive
the income tax free death benefit less any outstanding loans or withdrawals.
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Case Study:Steve’s Seafood Restaurants
Steve’s Goals:• Make sure that either he or his wife, Diane,
will be able to continue the business in the event of the other’s death
• Provide a death benefit for their children
• Establish greater retirement savings for him and Diane, should the business fail to fully support them in their retirement years
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
Potential Solution:Executive Bonus Benefits for Steve and Diane:• They are not forced to include other
employees in the plan• 100% of the contributions go to the owners’ plans*• No complex administration (or associated costs)• Death benefit to help continue the
business and provide for beneficiaries• Potential for supplemental income through
tax-advantaged loans and withdrawals*** If the business is a pass through entity, an Executive Bonus plan may not provide an income tax deduction advantage when the owners are participants.
**Tax-favored distributions assume that the life insurance policy is properly structured, is not a modified endowment contract (MEC), and distributions are made up to the cost basis and policy loans thereafter. Loans and withdrawals will decrease the cash value and death benefit. If the policy has not performed as expected and to avoid a policy lapse, distributions may need to be reduced, stopped and/or premium payments may need to be resumed. Should the policy lapse or be surrendered prior to the death of the insured, there may be tax consequences.
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
1 43 $37,371 $2,384,602 $40,708 $2,384,602
10 52 $334,075 $2,384,602 $528,921 $2,384,602
20 62 $580,598 $2,384,602 $1,513,218 $3,148,448
30 72 $123,289 $2,384,602 $2,534,205 $4,057,667
40 82 Lapse at age 70 Lapse at age 70 $4,090,188 $5,327,470
Policy Year Age Insured Cash Value Death Benefit Cash Value Death Benefit (Assuming 0% (Assuming 0% (Assuming 8% (Assuming 8%
rate of return and rate of return and rate of return and rate of return and guaranteed charges) guaranteed charges) guaranteed charges) guaranteed charges)
Hypothetical Example. Actual results will vary. This example uses MetLife's Equity Advantage Variable Universal Life product. Male, Age 42, Standard non-smoker. Policy premium of $50,000 for 20 Years. Cash Value Accumulation Test.
Assumptions for both charts: Guaranteed charges = Sales Load 5% for policy face amounts greater than $5,000,000 this charge is reduced to 3.5%.
Potential Cash Value and Death Benefit Amounts
How the Policy Can Build Cash Value…(Steve)
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1 41 $38,315 $2,919,048 $41,691 $2,919,048
10 50 $347,055 $2,919,048 $547,344 $2,919,048
20 60 $608,676 $2,919,048 $1,561,228 $3,869,816
30 70 $247,007 $2,919,048 $2,675,243 $5,015,626
40 80 Lapse at age 75 Lapse at age 75 $4,491,896 $6,630,398
Policy Year Age Insured Cash Value Death Benefit Cash Value Death Benefit (Assuming 0% (Assuming 0% (Assuming 8% (Assuming 8%
rate of return and rate of return and rate of return and rate of return and guaranteed charges) guaranteed charges) guaranteed charges) guaranteed charges)
Hypothetical Example. Actual results will vary. This example uses MetLife's Equity Advantage Variable Universal Life product. Female, age 40, Standard non-smoker. Policy premium of $50,000 for 20 years. Cash Value Accumulation Test.
Potential Cash Value and Death Benefit Amounts
Assumptions for both charts: Guaranteed charges = Sales Load 5% for policy face amounts greater than $5,000,000 this charge is reduced to 3.5%.
How the Policy Builds Cash Value…(Diane)
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Benefits to employerDecide whom the plan coversDetermine the amount of the benefitRestrict access to policy cash values for a period of timeObtain current business tax deductionRecruit, reward and retain best employees
Benefits to employeesProvide life insurance death benefit for executives’ beneficiariesProvide potential source of supplemental
retirement income
Benefits to Your Clients
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Benefits to You
Deepens client relationshipsMay free up additional assets for the
business ownerCreates potential for multiple salesPotential for valuable new clients
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Action plan
Have agreement drafted and signed by all parties5
Discuss strategic partnership1Identify and qualify clients2
Schedule time for client meetings and discuss approach 3Define client goals4
Initiate underwriting process on insured6
Employer pays bonus7
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Life 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
BDVL23045 L1212295913[1214] © 2013 METLIFE INC. PEANUTS © 2013 Peanuts Worldwide
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Equity Advantage Variable Universal Life is issued by MetLife Investors USA Insurance Company on Policy Form 5E-46-06 and in New York only, by Metropolitan Life Insurance Company on Policy Form 1E-46-06-NY-1. Variable products are distributed by MetLife Investors Distribution Company (member FINRA). All are MetLife companies. Guarantee Advantage Universal Life is issued by MetLife Investors USA Insurance Company on Policy Form 5E-34-07 and in New York only by Metropolitan Life Insurance Company on Policy Form 1E-34-07-NY. All product guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company. January 2013
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