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Complexity of Advanced Sales


... Section 79 Pension Captive Insurance Kia-zen Private ... Plans There are two ways ... needed life insurance protection. Business ... – PowerPoint PPT presentation

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Title: Complexity of Advanced Sales

Complexity of Advanced Sales Financial
You Want How Much?
Underwriting Humor
Underwriting Humor
Underwriting Humor
Innovative Products and Solutions

Enabling clients to arrive safely at their
Living Benefits
Paycheck for Life
Breadth of Portfolio
Why Life Insurance?
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

Access - Relationships - Professionalism
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

What Kind of Coverage?
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

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

One Stop Shop
Advanced Sales
Business Coverage
  • Keyman
  • Buy Sell
  • Loans Debt collateral assignment
  • Pensions
  • Business Succession/Continuation
  • Executive Benefits
  • Bonus Plan 
  • Split Dollar Arrangement
  • Executive Compensation

Free Vacation
Qualified and Non-Qualified Employee Benefit
  • 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

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

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

Getting Ahead
Nonqualified Plans
  • Section 409A or nonqualified deferred
  • 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)

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

  • 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

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
  • The business pays the premiums and reports the
    amount paid as bonused compensation to the
  • 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.

Executive Bonus Plan  (Section 162) IRS Tax Code
  • An executive bonus plan provides for the purchase
    of tax-deductible life insurance for selected key
  • 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

162 Executive Bonus Plan
  • Advantages of The Executive Bonus Plan
  • No approval by the Internal Revenue Service is
  • The employer may select the employees to be
  • Amounts of the coverage are set entirely by the
  • No maximum of minimum number of lives must be
  • 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

162 Executive Bonus Plan
  • How does it work?

Split Dollar
  • Split dollar is a funding arrangement between two
  • 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

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
  • 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.

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

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
  • 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

The Income Tax S79 Advantage
  • For the Employer
  • Contributions to the plan are tax-deductible, assu
    ming 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
  • 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

What does it mean?
Premium Finance
  • Is a valuable tool for wealthy individuals who
    need life insurance but dont want to tie up
  • Its a method for paying for life insurance using
    bank financing and involves collateral cash
    value and client assets.
  • Investors are looking for arbitrage.

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 ?ows, trading
    at different prices, but there is no guarantee
    that the prices will converge and there exist
    significant constraints on the investors forcing
  • 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.

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

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.

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.

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

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

Policy Donations
  • Gifting a life insurance policy can greatly
    reduce the donors taxable estate.
  • Gifting a policy can also yield a current income
    tax deduction of the policys 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.

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.

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

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.

Annual Income Growth Rate
  • For all US households for the 25-year period
    1980-2005 was 2.70 after adjusting for
  • A realistic range of long term real income growth
    is from a low of 1.5 to a high of 6.5 per year.

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

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.

Net Worth
  • 5,500,000 net estate
  • 5,000,000 in 2011
  • 500,000 taxable estate500,000 taxable
    estate x 40 rate
  •  20,000 tax liability

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)

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.

Human Value
Take Away
  • Consider the Human Value Calculation
  • Ultimate Total Line on a persons life
  • Include all the previous needs
  • Does it make sense?

Looking at it Differently
Suitability and Fiduciary-Duty
  • Just because an agent sold a life policy, does it
    make it a suitable sale?
  • Is it in the clients best interest?
  • There's a large difference between the
    suitability and fiduciary-duty standards.

  • Mental Break Time.
  • This is your last quiz of the night.
  • You deserve an easy Question?
  • What is 1 1 ?
  • Not this one
  • Still not this one
  • 2
  • Youve gone too far, go back to C.