Allianz Life Insurance Company of North America Executive

Allianz Life Insurance Company of North America Executive Compensation Strategies An introduction to small-business owners PPT-239 Our Mission: Allianz Life Insurance Company of North America is the trusted authority in insured retirement solutions for consumers working with a financial professional.

Agenda 1. Executive bonus plans 2. Restricted executive bonus arrangement (REBA) 3. Next steps Before we begin: This presentation is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, its affiliated companies, and their representatives and employees do not give legal or tax advice. We encourage you to consult your tax advisor or attorney. 2

1 Fixed index universal life 3

Attributed to Andrew Carnegie “Take away all my factories and my equipment. Take away my wealth. But leave me with my key people and in a short time I’ll have it all back again. ” Andrew Carnegie 4

The death benefit is the main reason for purchasing life insurance It passes income-tax-free to the beneficiaries and can be used for: § Income replacement for primary wage earners § Business succession § Mortgage and other debts § Estate tax coverage Source: 1“Small World: Trends in the U. S. Small Business Market, LIMRA, 2013. 5 Small businesses REQUIRE MULTIPLE TYPES OF FINANCIAL PROTECTION including: Personal coverage for the business owner Financial safeguards for the business Insurance and retirement benefits for the employees 1

Benefits of fixed index universal life insurance (FIUL) Income tax benefits § Death benefit is income-tax-free to beneficiaries. § Policy has the potential to accumulate cash value on a tax-deferred basis. § Any available cash value may be accessed through income-tax-free policy loans if the policy does not lapse or become a modified endowment contract (MEC). ¹ Keep in mind most life insurance policies require health underwriting and, in some cases financial underwriting. ¹Policy loans and withdrawals will reduce available cash values and death benefits, and may cause the policy to lapse or affect any guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change and you should consult your tax professional. Policy loans are not usually subject to income tax unless the policy is classified as a modified endowment contract (MEC) under IRC Section 7702 A. However, withdrawals or partial surrenders from a non-MEC policy are subject to income tax to the extent that the amount distributed exceeds the owner's cost basis in the policy. Loans, withdrawals or partial surrenders from a MEC policy are subject to income tax to the extent of any gains in the policy, and if the payment occurs prior to age 59 1/2, a 10% federal additional tax may apply. 6

HOW FIUL WORKS MAXIMUM PREMIUM a ail v ya Pays POLICY PREMIUMS ble UE L A OW R n V l to G paid A H S tia m is A n e C pot miu re the re p s Ha s mo a Cash value may be accessed via POLICY LOANS AND WITHDRAWALS 1 Minimum premium POLICYHOLDER POLICY FEES & CHARGES Fees & charges used to fund DEATH BENEFIT TO BENEFICIARIES AND OTHER VARIOUS EXPENSES Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change and your clients should consult a tax professional. 7 For financial professional use only – not for use with the public.

1 Executive Bonus Plans Utilizing life insurance for your key employees 8

Life insurance as part of an executive bonus plan Why would you use life insurance with an executive bonus plan for your employees? § Death benefit protection for your employees § Recruit and retain employees § Cash value accumulation potential for future needs¹ § Flexibility – you choose who participates § No IRS pre-approval – can be cost effective § Premium may be tax-deductible as a business expense For more information on the tax implications of contributions to or distributions from this or any other employee benefit plan, consult your attorney or tax advisor. ¹Policy loans and withdrawals will reduce available cash values and death benefits, and may cause the policy to lapse or affect any guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change and you should consult your tax professional. 9

Executive bonus plans How do they work with life insurance? § Employee is the owner and designates the beneficiary § Employer pays the premium § Premiums are considered salary § Also known as Section 162 bonus arrangements You should consult with an attorney and tax advisor to discuss your specific situation. 1”Small 10 World: Trends in the U. S. Small Business Market, ” LIMRA, 2013. The LOSS OF A VITAL EMPLOYEE can have a much more CATASTROPHIC IMPACT on the survival of a small company than a large one. 1

How can you attract and retain key employees? Executive bonus plans FOR WHOM? Sole proprietor Partnership Limited liability corporation (LLC) C Corporation S Corporation For more information on the tax implications of contributions to, or distributions from, this or any other employee benefit plan, consult your attorney or tax advisor. 11

Special concerns for some businesses § Certain entities are “flow throughs” for tax purposes § Owners of these business entities are taxed personally on all business income: - S Corporations - Partnerships - LLCs taxed as a partnership - Sole proprietors For more information on the tax implications of contributions to, or distributions from, this or any other employee benefit plan, consult your attorney or tax advisor. 12

Life insurance as part of an executive bonus plan: How it works This hypothetical example is provided for illustrative purposes only. 1 Policy loans and withdrawals will reduce available cash values and death benefits, and may cause the policy to lapse or affect any guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change and your clients should consult their tax professional. 13 Access available cash value through loans¹ to SUPPLEMENT RETIREMENT INCOME

Using a “double bonus” § Bonus employee enough to cover the taxes § Results in no out-of-pocket costs to employee § Also referred to as “grossed up” bonus § Formula to determine this larger bonus - Double bonus = Premium/1 – employee’s tax bracket - Example: Premium $100, 000 Employee’s tax bracket 40% This hypothetical example is provided for illustrative purposes only. 14 DOUBLE BONUS $100, 000 1 -. 40 = $166, 666

Benefits to you, the employer/business owner § Premium payments are currently deductible if: - considered “reasonable” compensation - employer is not directly or indirectly a beneficiary - for certain employees of a publicly traded corporation, the deduction is limited to $1 million per employee § No contribution limits § No administration costs § No participation requirements § No government reporting other than W-2 tax reporting § No employer access to cash value accumulation potential § Available cash value is not subject to corporate creditors § Simple arrangement For more information on the tax implications of contributions to, or distributions from, this or any other employee benefit plan, consult your attorney or tax advisor. Keep in mind most life insurance policies require health and, in some cases, financial underwriting. 15

Benefits to the key employee § Income-tax-free death benefit § Tax-deferred cash value accumulation potential § Income tax-free access to any available cash value through policy loans 1 § No premature distribution - federal additional tax for policy loans 1 § Secure from corporate creditors § Flexibility to access any available cash value through policy loans 1 § Simple arrangement § Portable 1 Policy loans and withdrawals will reduce available cash values and death benefits, and may cause the policy to lapse or affect any guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change and you are encouraged to consult your tax professional. Policy loans are not usually subject to income tax unless the policy is classified as a modified endowment contract (MEC) under IRC Section 7702 A. However, withdrawals or partial surrenders from a non-MEC policy are subject to income tax to the extent that the amount distributed exceeds the owner's cost basis in the policy. Loans, withdrawals or partial surrenders from a MEC policy are subject to income tax to the extent of any gains in the policy, and if the payment occurs prior to age 59 1/2, a 10% federal additional tax may apply. 16

Some additional considerations § Employee can leave the company at any time and take the insurance policy § Employee must be insurable § Premium payments = taxable income to the employee § No golden handcuffs § Requires attorney to draft bonus arrangement § Cost of life insurance needs to be considered § Health and financial underwriting For more information on the tax implications of contributions to, or distributions from, this or any other employee benefit plan, consult your attorney or tax advisor. 17

2 Restricted executive bonus arrangement (REBA) 18

What is a REBA? An executive bonus arrangement PLUS a GOLDEN HANDCUFF. A “golden handcuff” is a restriction on the life insurance policy that prevents the employee from access to the available cash value without the employer’s consent. Two parts to a REBA at Allianz § Executive bonus agreement drafted by an attorney § Restricted policy agreement form from Allianz Life insurance policy owned by the executive employee § Executive is the owner of the life insurance policy § Executive is the insured and names the beneficiary For more information on the tax implications of contributions to, or distributions from, this or any other employee benefit plan, consult your attorney or tax advisor. 19

Who is a REBA for? NON-OWNERS of the business Why not the owner? § Owners are already tied to the business § Use Executive Bonus with the owners of the business § Top hat/highly compensated executives C Corporation S Corporation Limited liability corporation (LLC) Professional corporations Partnerships For more information on the tax implications of contributions to, or distributions from, this or any other employee benefit plan, consult your attorney or tax advisor. 20

Some REBA advantages § Allows you to select which employees you wish to reward § Rewards key employees for services rendered to your business § Builds loyalty to your business – creates a “golden handcuff” § Provides employee’s family with a death benefit § Provides a potential income tax deduction to employer § Key employee has ownership of cash value life insurance with potential access to available cash value via policy loans¹ You should consult with your own tax and legal advisors for the tax and legal ramifications of using this employee benefit. 1 Policy loans and withdrawals will reduce available cash values and death benefits, and may cause the policy to lapse or affect any guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change and your clients should consult 21 tax professional. their

Some additional considerations of a REBA § Employer does not have ownership of, or any rights to, the life insurance policy § Employee is taxed income equal to the premiums paid with the bonus money received from the employer § Employee may need to obtain employer’s consent to access any available cash value § Costs of hiring an attorney to draft the legal document § Costs of purchasing the life insurance policy § Not available if the employee is uninsurable and has no insurable interest in an insurable person¹ You should consult with your own tax and legal advisors for the tax and legal ramifications of using this employee benefit strategy. ¹Keep in mind that most life insurance policies require health and, in some cases, financial underwriting. 22

How does a REBA work at Allianz? § The business pays the premium to fund a life insurance policy with cash value accumulation potential § Premium paid is treated as a bonus paid to the employee § The executive employee is owner the of the policy and names the beneficiary The employer and employee sign two documents: § Executive bonus agreement drafted by attorney § Restricted policy agreement – an Allianz Life Insurance Company of North America form You should consult with your own tax and legal advisors for the tax and legal ramifications of using this employee benefit. 23

How a REBA works at Allianz This hypothetical example is provided for illustrative purposes only. These characters are fictional and not actual Allianz clients. 24

Summary 1. Executive bonus plans 2. Restricted executive bonus arrangement (REBA) 3. Next steps 25

The next step Work with your team of professionals to see if fixed index universal life insurance could be part of your businessplanning strategies.

Disclosures Allianz Life Insurance Company of North America (Allianz) Guarantees are backed by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America. The Employee Retirement Income Security Act (ERISA) may apply. Be sure to consult your tax advisor or attorney regarding your own situation. Products are issued by Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN 55416 -1297. 800. 950. 1962 www. allianzlife. com Product and feature availability may vary by state. 27

Products are backed by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America. Product and feature availability may vary by state.