Transcript Business Life Insurance

Business Life Insurance
Concepts & Sales Opportunities
L-16449-A 4/04
For Producer Use Only.
Not for Use With the General Public.
Overview
• Types of business
organizations
• Life insurance uses
• Sales Opportunities
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Types of Business
Organizations
• Sole proprietors
• Partnerships
• Corporations
• Limited liability companies
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Closely-Held Businesses
• Personal Wealth = The
Business
• Ownership = Management
• The owner is the business is
the owner
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Developing an Exit Strategy
• Retirement Planning
• Does the owner want to retire?
How?
• Succession Planning
• Who takes over? How?
• Estate Planning
• Will taxes force a business sale?
Life insurance is part of a
successful Exit Strategy
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Business Life Insurance
• Business succession
• Key person indemnification
• Employee benefits
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Business Succession
What happens when an owner
dies?
Surviving owners have 5 choices:
•
•
•
•
•
Work with the Heirs
Sell out to the Heirs
Buy out the Heirs
Work with Outside Buyers
Liquidate the business
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Work with the Heirs
• As Active Co-owners
• Are they qualified?
• Can’t we all get along?
• As Inactive Co-owners
• Will they demand money?
• Will they support management?
• Children heirs may require guardians
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Sell out to the Heirs
• Do they have the money?
• Can they run the business?
• Are the sellers willing to stay
on as mere employees?
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Buy Out the Heirs
• At what price?
• Do they have the money?
• Cash
• Installment purchase.
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Work with Outside Buyers
• Will they support
management?
• Are they qualified?
• Do they get along?
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Liquidate the Business
• A business in liquidation has
only a fraction of the value of
a going concern
• Without planning, this option
may be forced on the parties.
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Business Succession
What happens when the owner dies?
Decedent’s Family have 2 Choices:
• KEEP the business in the family
• Who will run the business?
• What is the source of funds for dependents?
• How will estate settlement costs be paid?
• SELL the business
• Who will buy?
• What price?
• Where will the buyer get the money?
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
The Problem
When a business owner
dies, the business often
dies too and with it the
livelihood of the
surviving owners and the
deceased’s family.
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
The Solution
A Buy-Sell Agreement
funded with Life Insurance
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Buy-Sell Agreements-Features
• Business protected from inactive
shareholders
• Profits inure to those active in the
business
• Assurance of a fair price for the stock
• Smooth transition
• Family’s needs are met
• Family’s future not tied to fate of the
business
• Source of liquidity to pay death taxes
• “Fix” the value of the business for the IRS
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Funding the Buy-Sell Agreement
ADVANTAGES
CASH
•
Simple
•Immediate
BORROWING
•
INSTALLMENT
SALE
Reduced initial outlay
•Seller gets full
payment
Reduced initial outlay
•Gain may be deferred
•
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
DISADVANTAGES
May be insufficient
•Accum. earnings tax?
•After-tax dollars
•
Death may impair credit
•Debt service costs
•
Seller’s receipts
delayed
•Seller remains
dependent
•
Life Insurance Funding
ADVANTAGES
•Predictable &
Affordable
DISADVANTAGES
•Age & Health
considerations
•Cash when
•May not address all
needed
needs
•Income tax-free
payments
•Cash value for
lifetime sale
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Types of Buy-Sell Agreements
• Entity Purchase (Stock Redemption)
• Agreement between the stockholders and
the corporation. The corporation
purchases the stock of the deceased
stockholder.
• Cross Purchase
• Agreement among the stockholders. The
corporation is not a party. Surviving
stockholders purchase the deceased’s
stock
• Hybrid (Wait and See)
• Combines characteristics of both crosspurchase & entity purchase agreements
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Key Person Insurance
• The most important asset of any
business is its people.
• According to a Dun & Bradstreet
study, 96% of business failures were
due to people failures.
• Attracting & retaining good people is
critical to business success.
• Insuring the business against loss of
key people is as important as
insuring against loss of equipment.
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Key Person Insurance
• Indemnifies the business for loss
of a key employee.
• Key persons exist throughout a
company:
• Person responsible for the firm’s
credit
• Product development manager
• Key salespeople
• Anyone whose loss would result
in significant disruption
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Key Person Insurance - How Much?
• How much would it cost to
replace the employee?
• How much is the employee worth
in net profits?
• How much would the business
lose if the employee died today?
• How much is the business willing
to self-insure?
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Key Person Insurance –
Benefits
•
•
•
•
Cash to keep the business running
Cash to re-assure creditors
Cash to cover losses
Cash to search for and hire a
replacement
• Simple to implement
• No special agreements required
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Employee Benefits
• Bonus Plans
• Split Dollar
• Deferred Compensation
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Bonus Plans
• Employee purchases a life
insurance policy
• Employer pays premiums
• Employee income = premiums
paid
• Ensures employee’s long-term
financial security
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Bonus Plan Using Life
Insurance
Employer
2
1
Premium
Bonus
3
Policy Cash
Values
Employee
1.
2.
3.
4.
Life
Insurance
Policy
4
Policy Death
Benefits
Beneficiaries
Employer pays premium on employee owned life insurance policy.
Employer's premium payment constitutes bonus compensation to the employee.
Employee enjoys tax deferred growth in policy cash values and may be able to access those
cash values free of income tax to supplement his or her retirement income needs.
At death, the employee's beneficiaries receive income tax free life insurance death benefits.
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Bonus Plans
• Employer Advantages:
• Tax Deductible
• Simple to administer
• Pick & choose participants
• Employer Disadvantages:
• Lack of control
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Bonus Plans
• Employee Advantages:
•
•
•
•
Asset Protection
Control & Portability
Relatively small out-of-pocket cost
Tax-deferred growth of policy cash
values
• Potentially tax-free access to policy
cash values
• Employee Disadvantages:
• Current taxation
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Split Dollar Plans
• Method of purchasing life insurance
• Several parties split the costs and
benefits of a life insurance policy
• 2 methods (depends on who owns policy):
• Loan approach: Non-owner loans
premiums to the policyowner
• Economic Benefit (EB) approach:
Policyowner provides life insurance
benefits to the other party
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Split Dollar - Loan
• Used when Non-Owner pays premiums
• Exception: Non-equity plans
• Employer lends premium to employee
• Loan interest:
• Based on Applicable Federal Rate
(AFR)
• Either paid by employee, or imputed
to employee as income
• Interest income to employer (lender)
• Loan is repaid from policy cash value or
death benefit
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Split Dollar Life Insurance
(Loan arrangement)
1
Premium
Employer
4
Death
Benefits
2
3
Loan interest
Interest
income
3.
4.
5.
5
Death
Benefits
Beneficiaries
Employee
1.
2.
Life
Insurance
Policy
Employer pays premium on life insurance policy insuring a key employee.
The loan interest is imputed as income to the employee. (Alternatively, the employee may
pay interest to the employer).
Employer recognizes interest income.
At death, a portion of the death benefit is paid to the employer (equal to the cumulative
premium loans).
The balance of the death benefit is paid to the employee's personal beneficiaries.
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Split Dollar – Economic Benefit
• Used when Owner pays premiums
• Employer agrees to pay for some or all of the
premium in return for an interest in the policy
• Employer’s interest typically = premiums paid
or policy cash value
• Employee recognizes income every year:
• Value of life insurance protection received
(less any payments made by employee),
• Value of other benefits received (policy cash
values, dividends, riders, etc.)
• Employer recovers its interest from policy cash
values or death benefit
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Split Dollar Life Insurance
(Non-loan arrangement; Endorsement or Non-equity plans)
1
Premium
Employer
3
2
Death Benefits
Economic Benefit
3.
4.
4
Death
Benefits
Beneficiaries
Employee
1.
2.
Life
Insurance
Policy
Employer pays premium on life insurance policy insuring a key employee.
The value of the life insurance protection (currently based on Table 2001) is considered
an economic benefit to the employee and is included in employee's income.
At death, a portion of the death benefit is paid to the employer (usually greater of
cumulative premiums or cash value).
The balance of the death benefit is paid to the employee's personal beneficiaries.
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Split Dollar Life Insurance
• Advantages - Employer
• Cost recovery
• Selective benefits
• Nominal ERISA compliance
• Simple administration
• Flexible design
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Split Dollar Life Insurance
• Advantages - Employee
• Reduced current cost for life
insurance
• Reduced gifts for estate planning
purposes
• Frees up cash for other needs
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Split Dollar Life Insurance
• Disadvantages – Employer &
Employee
• Perceived complexity
• Tax law changes
• Need for a rollout strategy
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Deferred Compensation Plans
• What is it?
• An unsecured promise to pay
future benefits
• Informally funded with life
insurance
• Employers subject to ERISA must
limit participation to “Top Hat’
employees
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Deferred Comp - Example
• Corporation promises to pay key
employee a supplemental retirement
benefit of $30,000 for 10 years.
• Corporation purchases life insurance
to “informally” fund its obligation
• At retirement, corporation may use
policy cash values to pay benefits
• At employee’s death corporation
recovers its costs from life insurance
death benefit
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Deferred Compensation
• Important Considerations:
• Type of business
• Owner vs. employee participants
• Special concerns for controlling
shareholders
• Sponsoring company should be
financially strong
• The promise is as good as the
company making it
• Limited to “top hat” employees
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
The Business Insurance
Market
• Small business is Big Business!
• Sales Opportunities
• Larger insurance sales
• Larger premiums
• Larger commissions
• Addressing client’s total
insurance needs
• Protect and strengthen client
relationships
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
For a non-MEC (modified endowment contract) policy, income taxes are generally
due upon withdrawal, only to the extent that they exceed cost basis. However,
withdrawals during the first 15 policy years may be subject to special rules
and could trigger a taxable distribution. For a MEC policy, income taxes are
due upon withdrawal to the extent there are cash values in excess of cost
basis (gain) in the contract. Further, a withdrawal of cash values in excess of
cost basis before age 59 ½ could trigger a 10% tax penalty. While loaned
amounts are generally not subject to taxation, a loan or assignment of a MEC
with gain could result in a taxable event.
Neither Travelers Life & Annuity nor its representatives provides tax or legal
advice. Please have clients consult their own tax and/or legal advisor for such
guidance. Variable life insurance is medically underwritten, so all candidates
should be in reasonably good health. There may be partial and/or full
surrender charges for early withdrawal from life insurance. The death benefit
from life insurance is generally income tax-free, but have clients consult their
own tax advisor about the income tax consequences when the life insurance
death benefit is paid to an entity other than an individual.
The comments about tax treatment simply reflect our understanding of current
interpretations of tax laws as they relate to estate planning and life insurance.
Since tax laws are always subject to interpretation and possible changes in
the future, we recommend that clients seek the counsel of their attorney,
accountant or other qualified tax advisor regarding estate and life insurance
as it applies to their particular situation.
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.
Life insurance is issued by The Travelers Insurance Company or The
Travelers Life and Annuity Company (depending on jurisdiction),
One Cityplace, Hartford, CT 06103-3415. Travelers Distribution
LLC is the principal underwriter. In New York, policies are issued
by The Travelers Insurance Company.
This material describes a concept that may be used with a variable or
a non-variable product. Variable products are sold by prospectus.
For more information about a variable product, including fees and
charges, request a prospectus from the address above. Variable
life insurance is subject to market risk, including possible loss of
principal, and a reduction of the death benefit depending on the
death benefit selected.
For Producer Use Only.
L-16449 4/04
Not for Use With the General Public.