FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 1 Business Planning Using Life Insurance Retain, Recruit, and Reward Manulife Financial and the block design

FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.1

Business Planning Using Life Insurance

Retain, Recruit, and Reward

Manulife Financial and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Companyand are used by it and its affiliates including Manulife Financial Corporation. Copyright 2002. The Manufacturers Life Insurance

Company (U.S.A.) All rights reserved. MLI0504018904. Expires 12/31/2002.

THIS MATERIAL MAY NOT BE COPIED OR USED WITH THE PUBLIC.


An Introduction

• Business Insurance is:– The purchase of life insurance by an employer on

the life of an employee– Used to provide an additional benefit in an informally

funded non-qualified deferred compensation plan or to protect the business in the event of the death of a key individual.


Business Life Insurance Plans

• Key Person• Executive Bonus/REBAs• Deferred Compensation Plan

– Salary Deferral– SERPs

• Split Dollar• Buy-Sell Arrangements


Key Person Insurance

• Insurance Policy taken out on the life of a key employee to protect the business in case of sudden death.

• A key employee is anyone in the business whose loss would affect profits and day-to-day operations – Owner, Partner, or irreplaceable executive.


Benefits of Key Person Insurance

• Protects the business from financial loss due to the death of key employee

• Business may borrow from the policy cash value*

• Death benefit is received by the company directly free from income taxes.

*Withdrawals and loans from life insurance policies, which are classified as modified endowment contracts, may be subject to tax at the time the withdrawal or loan is made. A federal tax penalty may also apply if the withdrawal or loan is taken before age 59 1/2. Withdrawals and loans also have the effect of reducing the Death Benefit and Cash Surrender Value. Consult your Manulife Financial Representative.


How Does Key Person Insurance Work?

• Business buys a life insurance policy on a key employee

• Business is the owner and beneficiary of the policy

• Business pays the entire premium

Employee

Key Person Insurance

BusinessManulife Financial Insurance Policy


Non-Qualified Executive Benefit Plans


Non-Qualified Deferred Compensation

• Arrangements between an employer and executive to provide key executives with additional retirement benefits

• Selective and does not need to be offered to all employees

• Used to retain, recruit, and reward key employees


Types of Non-Qualified Deferred Compensation Plans

Employee FinancedEmployee Financed Employer/Employee Employer/Employee FinancedFinanced

Employer FinancedEmployer Financed Group PlansGroup Plans


Employee Benefit Limits for 2002

Maximum 401(k) Contributions $ 11,000

Defined Benefit Amounts (Section 415)

$160,000

Highly Compensated Employee

$ 90,000

Defined Contribution Limits $ 40,000

Limits on Compensation from Qualified Plans

$200,000


Reverse Discrimination

0%

10%

20%

30%

40%

50%

60%

$200K $225K $250K $300K $400K

Retirement Benefits as % of Final Salary

Salary


The Power of Deferred Compensation

$0$5,000

$10,000$15,000$20,000$25,000$30,000$35,000$40,000$45,000$50,000

$10K invested at 8% $6K invested at 8%

10yrs15yrs20yrs

Assumes lump sum deferral amount of $10,000 growing over 20 years at 8% compared to a lump sum of $6,000 ($10,000 at 40% after-tax) also growing at 8% for 20 years.


Salary Deferral Plans

• Executives elect to defer part of their salary• Often referred to as 401(K) mirror plans• More flexible than standard Qplans• Do not have maximum deferral limits• May exclude rank and file employees• Executive financed plans


How Salary Deferral Plans Work

• Executive elects to defer a certain amount at the beginning of the year

• The amount is credited to a “phantom” interest bearing account.

• Will be distributed for a certain period of time - starting at retirement


Power of Salary Deferrals

$0

$50,000

$100,000

$150,000

$200,000

$250,000

Dollars

Deferred Non-Deferred

Total Avaiable

Salary Deferral Withdrawals

Deferred Non-Deferred

This example assumes a one-year deferral of $55,000 for 15 years into a phantom account growing at 10%. The non-deferred cash assumes the same $55,000 after-tax (40% income tax rate) at 10%. Total for deferred is $229.749 and non-deferred is $137,849.


The ConceptThe Concept

Specifics:

• The executive agrees to defer a portion of income

• The employer agrees to provide a specific flow of income at a specific future time.

• The employer uses the deferred income to purchase a policy. Policy benefits are used to fund the agreed to retirement compensation.

Specifics:

• The executive agrees to defer a portion of income

• The employer agrees to provide a specific flow of income at a specific future time.

• The employer uses the deferred income to purchase a policy. Policy benefits are used to fund the agreed to retirement compensation.

The Salary Deferral Plan

ExecutiveExecutiveAgreement touse deferral topurchase lifeinsurance policy

Agreement todefer a specifiedamount of income

Employer purchasesand owns the policy

EmployerEmployer


The StructureThe Structure

Notes:

•The Employer is able to provide significant pre and post retirement benefits on a deferred basis.

•The Employer’s cost is significantly reduced and stabilized with complete recovery possible through direct receipt of tax free death proceeds.

•The Executive enjoys substantial retirement and family security benefits.

Notes:

•The Employer is able to provide significant pre and post retirement benefits on a deferred basis.

•The Employer’s cost is significantly reduced and stabilized with complete recovery possible through direct receipt of tax free death proceeds.

•The Executive enjoys substantial retirement and family security benefits.

BeneficiariesBeneficiaries

EmployerEmployer ExecutiveExecutive

The Salary Deferral Plan

Pre RetirementCompensation

Post RetirementCompensation

Cash Valueto fund deferred

compensation

Cash Valueto fund deferred

compensation

Tax Freedeath benefitto fund continuingcompensation to heirs

Tax Freedeath benefitto fund continuingcompensation to heirs



Supplemental Executive Retirement Plan (SERP)

• Employer sponsored non-qualified deferred compensation plan

• Provides retirement benefits to highly compensated executives

• Can be used with qualified plans• Combats “reverse discrimination”


How Does a SERP Work?

• Corporation and select executives enter into an agreement that pays the executives a certain amount at retirement

• Can be informally funded with life insurance• Employer is the owner and beneficiary of the

policy


Executive Bonus Plans

• Employer/executive financed plans• An arrangement between the executive and the

corporation• The corporation pays the premium on a life

insurance policy on the executive• Executive is the owner and beneficiary of the

policy


Advantages of a Bonus Plan• Corporation

– Simple to install– No minimum or maximum lives– Employer cost may be tax deductible

• Executive– Death benefit protection– Supplemental retirement income– Can access the policy cash value at anytime



How Does a Bonus Plan Work?

CorporationExecutive

ManulifeFinancialInsurancePolicy

IRS

Bonus premium amount

Pays premium

In retirement, takes withdrawals

Pays tax to IRS on premium



Restrictive Endorsement Bonus Arrangement (REBA)

• Employer financed plans• Employer agrees to pay premium of life

insurance policy to be owned by the executive• Executive files a restrictive endorsement with

life insurance company


Advantages of a REBA

• Corporation– Distinguished compensation package– Minimal set-up cost– “Golden handcuffs”

• Executive– Portable death benefit– Supplemental retirement income



REBA Agreement

• Prevents the executive from– Surrendering the cash value– Taking loans and withdrawals from the policy– Changing ownership– Using the policy as collateral

• Executive can– Name the beneficiary



Split Dollar Arrangements


Advantages of Split Dollar Plans

• Corporation– Death benefit protection– Access to cash values– Selective– Simple to implement

• Executive– Death benefit protection– Protects insurability


How Does a Split Dollar Plan Work?

• Corporation and executive enter into an arrangement

• The corporation will pay the bulk of the premium• The executive pays the economic benefit

amount


• Mandatory for plans when the business seeks to recover amount in excess of premium paid, i.e. key person indemnity or deferred compensation.

• Ideal when control of the plan is to be with the employer providing benefit, or a Non-Owner Employee.

Endorsement Method


Relative Premiums

Policy Premium SplitPolicy Premium Split

Endorsement Method

Corporate

Executive


Policy Proceeds SplitPolicy Proceeds Split

Endorsement Method

Total Death Benefit

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Executive Death Benefit

Corporate Return of Premium

Excess Corporate Cash Value


• In most cases it’s the customary method used to remove proceeds from majority shareholder’s estate

• Debtor-creditor relationship is created• Places effective control in hands of insured/executive• Ideal when ultimate objective is to provide continuing post-

retirement coverage

Collateral Assignment Method


Policy Cash Value SplitPolicy Cash Value SplitTotal Cash Value

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Balance to Executive

Employer Return of Premium



Policy Proceeds SplitPolicy Proceeds Split

Total Death Benefit

$0$200,000$400,000$600,000$800,000

$1,000,000$1,200,000$1,400,000$1,600,000$1,800,000$2,000,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Balance to Executive’s Beneficiary

Corporate Return of Premium



Split Dollar SummarySplit Dollar Summary


Buy-Sell Arrangements

• A buy-sell arrangement is a binding agreement in which one party agrees to sell the interest and the other party will buy the interest.

• Transactions occur– At death– At retirement– At disability


Types of Buy-Sell Arrangements

• Stock Redemption or Entity Purchase

• Cross Purchase• Wait and See


• The business agrees to buy life insurance on the lives of the owners.

• Agreement states that the owners or their estates agree to sell interest in the business and the business agrees to buy it.

• Business is the owner and beneficiary of the life insurance policy.

Stock Redemption or Entity Plan


Pays Premiums

Agreement Agreement

During Lifetime

Owner A Owner B

The Business owns insurance policies on each owner

Business



Business

Owner B

Pays Death Benefit

CashBusinessInterest

Upon A’s Death

Stock Passes

A’s Family or Estate



Cross-Purchase Plan

• Owners take life insurance policies out on each other

• Survivor purchases deceased owner’s shares in company

• Life insurance proceeds help to provide the funds


Cross Purchase Plan

During Lifetime

Each Owner Obtains Insurance On the Other

Pays Premiums Pays Premiums

Business

Owner A Owner B


Advantages of Cross Purchase

• Purchasing shareholder will get step-up in cost basis• Life insurance proceeds are income tax free• Avoids possible treatment of redemption as a dividend.• No AMT or accumulated earnings tax problems.• Can reallocate ownership of the surviving owners by

purchasing varying amounts of the deceased owner's shares.


Pays Death BenefitStock Passes

Cash

A’s Family or Estate

Business

Business Interest

Upon A’s Death

Cross Purchase Plan

Owner B


Wait and See Arrangement

• Owners agree to buy and sell their shares but the price is not determined until death, retirement, or disability

• Owners purchase life insurance on each other• Business has right of first refusal, owner second

right, and the business must purchase remaining shares


During Lifetime

Each Owner Obtains Insurance On the Other

Pays Premiums Pays Premiums

Business

AgreementAgreement

“Wait and See” funded by owners

Owner A Owner B

Pays Premiums


“Wait and See” funded by owners

Upon A’s Death

Owner B

Stock Passes

Death Benefit

Option toPurchase

2nd

Option toPurchase

MustPurchase

3rd1st $

$

$


MLI SolutionsSM Business Planning Series

Simple Solutions to Complex Business Planning Problems


What is the MLI SolutionsSM

Business Planning Series?

• A state-of-the art business planning software system

• Makes the most difficult case easy-to-understand• Has cutting edge composite capability• One of the most advanced systems on the market

today• Launched in August 2000


What is it?

• Works hand-in-hand with the Manulife Illustration system

• Allows comparisons between concepts• Makes running a complex case a walk in

the park


The Business Planning Series

• REBA• Executive Bonus Plans• SERP Swaps• SERPs/Deferred Income Plans• Buy-Sell Agreements


For More Information

Call the Advanced Markets Group at 888-266-7498


Business Planning Using Life Insurance

Manulife Financial and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Company and are used by it and its affiliates including Manulife Financial Corporation. This material is for informational purposes only. For more detailed information please contact your advisor. Manulife Financial or any of its agents, employees, or registered representatives do not give legal, tax, investment, or accounting advice. The information given here is merely a summary of our understanding of the current laws and regulations. Prospective purchasers should consult their tax advisor.

The End

Documents

FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 1 Business Planning Using Life Insurance Retain, Recruit, and Reward Manulife Financial and the block design