Funding keyperson life insurance and buysell agreements Deb
Funding key-person life insurance and buy-sell agreements § Deb Repya – Vice President, Advanced Markets § Tomas Perez – Regional Sales Manager Allianz Life Insurance Company of North America For financial professional use only – not for use with the public. Our Mission: Allianz Life is the leading innovator of financial solutions for consumers who want protection, income, and the guidance of a trusted financial professional. PPT-171
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. Encourage your clients to consult their tax advisor or attorney. 2 For financial professional use only – not for use with the public.
Agenda 1 Key person life insurance 2 Buy-sell agreements funded with life insurance 3 Hypothetical case studies 4 Next steps 3 For financial professional use only – not for use with the public.
Business owners’ concerns § What happens to my business at my death? § Will my beneficiaries need to sell my business to obtain cash to pay estate taxes and liabilities? § Will my beneficiaries and/or surviving business partners be able to work together harmoniously? § Will my business continue to be profitable in the event of my unexpected death or the death of a key employee? § How can I retain key employees? 4 For financial professional use only – not for use with the public.
How do key employees add value to your clients’ business? 5 For financial professional use only – not for use with the public.
How do key employees add value to a business? In what ways do key employees add value? § Acquire and manage key accounts § Manage productive teams § Oversee vital areas of operation § Create innovative products § Open new markets § Motivate other top performers 6 For financial professional use only – not for use with the public.
How is your client’s business at risk? What would the economic impact be if key employees were no longer actively involved in the business? § Loss of management skill and experience § Disruption in sales or business production § Business may experience credit difficulties § Cost of hiring and training a replacement 7 For financial professional use only – not for use with the public.
Key person life insurance coverage Transition alternatives: 1. Bring beneficiaries into the business 2. Accept outside employees into the business 3. Sell to partner’s beneficiaries 4. Buy out beneficiaries 8 For financial professional use only – not for use with the public.
Key person life insurance coverage Transition goals § Maintain profitability of the business § Protect the value of the business § Minimize interruption in operations § Meet short-term financial and production obligations 9 For financial professional use only – not for use with the public.
Key person life insurance coverage How can businesses fund their transition plan? § Pay cash § Borrow funds § Installment payments § Insurance 10 For financial professional use only – not for use with the public.
How does key person life insurance protect the business? 11 For financial professional use only – not for use with the public.
Key person life insurance coverage § Insurance on the life of a key employee § Strategies utilizing life insurance are dependant on insurability § Helps protect the business and/or employer against the economic loss caused by the death of a key employee § Business applies for, pays the premiums for, owns, and is the beneficiary of life insurance on the key employee’s life 12 For financial professional use only – not for use with the public.
Key person life insurance coverage Gen. Dex® Momentum Fixed Index ABC, Inc. Employee Universal Life Insurance Policy • Owner • Funding vehicle • Insured • Payer • Beneficiary This hypothetical example is provided for illustrative purposes only. This character is fictional and not an actual Allianz client. 13 For financial professional use only – not for use with the public.
Why use life insurance for key person coverage? § The employer receives needed funds which can be used to meet financial obligations and hire a replacement § Death benefit proceeds are exempt from the regular income tax (but may be subject to corporate alternative minimum tax) § Access to cash value 14 For financial professional use only – not for use with the public.
Other uses of key employee insurance § Cash and loan values provide business with a source of funds § Show creditors the business is prepared for an emergency § Use policy as collateral for loan § Help fund a buyout § Fund deferred compensation agreement 15 For financial professional use only – not for use with the public.
Tax implications of key employee insurance § Premiums are not tax-deductible § Accumulation of cash value is generally exempt from federal income tax for corporations § Accumulation of cash value may be subject to corporate alternative minimum tax § Interest paid by a business on policy loans may be nondeductible § Death benefit proceeds from the policy are generally exempt from federal income tax unless distributed to a third party § Death benefit proceeds from the policy may be subject to the corporate alternative minimum tax 16 For financial professional use only – not for use with the public.
Tax implications of key employee insurance § Policy surrender may trigger taxable earned interest § Premiums paid by business are not taxable as income to employee § Death benefit proceeds are usually not included in the key employee’s gross estate for estate tax purposes 17 For financial professional use only – not for use with the public.
How much coverage is enough? § Replacement value § Business life value § Multiple of salary § Contribution to profits 18 For financial professional use only – not for use with the public.
What happens if a key employee leaves or retires? § The business can continue to pay the premium and receive the death benefit proceeds § If the key employee retires, the business can offer the policy as a bonus § Surrender the policy 19 For financial professional use only – not for use with the public.
Appropriate entities for key person insurance § Sole proprietor § Partnership § C corporation § S corporation § Limited liability corporation (LLC) 20 For financial professional use only – not for use with the public.
Key person life insurance coverage: Case study Hypothetical scenario: John and ABC, Inc. § John is a 45 -year-old executive with ABC, Inc. § John is a key contributor to the business and if he passed away prematurely, the business could face transition costs § ABC, Inc. purchases a life insurance policy on John for $1, 000 This hypothetical example is provided for illustrative purposes only. This character is fictional and not an actual Allianz client 21 For financial professional use only – not for use with the public.
Important information for sales concept that follows on next slide Policy loans are not usually subject to income tax unless the policy is classified as a modified endowment contract under IRC Section 7702 A. However, withdrawals or partial surrenders are subject to income tax to the extent that the cash value in the policy immediately before the distribution exceeds the owner’s tax basis in the policy, and if taken prior to age 59½, a 10% federal tax penalty may apply. Policy loans 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. P 50570 -01, P 52451 -01, and PS 52453 and state variations are issued by Allianz Life Insurance Company of North America. 22 For financial professional use only – not for use with the public.
Key person life insurance coverage: Case study Assumptions: Male, age 45, Standard Nontobacco risk class, $1, 000 death benefit Life insurance type Annual premium Cumulative premium at 20 years Cash value at 20 years Gen. Dex Momentum $16, 065 $321, 300 $478, 8112 Based on 2% guaranteed minimum interest rate and highest fees and charges – In 20 years at age 65 the Gen. Dex Foundation cash value would be $34, 528 and the Gen. Dex Momentum cash value would be $140, 581. 1 Gen. Dex Foundation cash accumulation value is based on a 5. 35% fixed interest rate. 2 Based on historical performance, the allocation options, had they been available, would have returned a wide range of interest rates. Some would have exceeded 8% and some would have been less than this. Keep in mind that different time periods and different indexes will produce higher or lower averages. The interest rate is based on the caps, participation rates, or spreads in the policy and is subject to change on any policy anniversary based on several external factors including, but not limited to, market volatility, short-term interest rates, and long-term interest yields. See the contract for more details. This hypothetical example is provided for illustrative purposes only. This character is fictional and not an actual Allianz client 23 For financial professional use only – not for use with the public.
Blended index Allianz Life Insurance Company of North America (Allianz) Blended index: Dow Jones Industrial Average. SM (35%), Barclays Capital U. S. Aggregate Bond Index (35%), Euro STOXX 50® (20%), Russell 2000® ( 10%) The EURO STOXX 50® is the intellectual property (including registered trademarks) of STOXX Limited, Zurich, Switzerland. Allianz products based on the Index are in no way sponsored, endorsed, sold, or promoted by STOXX and shall not have any liability with respect thereto. The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U. S. stocks representative of the overall economy. The Barclays Capital U. S. Aggregate Bond Index is comprised of U. S. investment-grade, fixed-rate bond market securities, including government, government agency, corporate, and mortgage-backed securities. Barclays Capital and Barclays Capital U. S. Aggregate Bond Index are trademarks of Barclays Capital Inc. (“Barclays Capital”). The product is not sponsored or endorsed by Barclays Capital, and no representation or warranty to purchasers of the product is made regarding the advisability of purchasing the product. Barclays Capital’s only relationship to Allianz Life Insurance Company of North America (“Allianz”) is the licensing of the Barclays Capital indices which are determined, composed, and calculated by Barclays Capital without regard to Allianz or the product. Barclays Capital does not guarantee the quality, accuracy, and/or completeness of the Barclays Capital indices, or any data included therein, or otherwise obtained by Allianz, owners of their products, or any other person or entity from the use of the Barclays Capital indices in connection with the right licensed hereunder or for any other use. Russell 2000 Index is an equity index representing 2, 000 of the smallest companies within the larger Russell 3000 Index. It is often looked at as one benchmark for small stock investors. Russell 2000 is a registered service mark of Frank Russell Company. Products are issued by Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN 55416 -1297. Product and feature availability may vary by state. 800. 950. 7372 www. allianzlife. com 24 For financial professional use only – not for use with the public.
Buy-sell agreements § Business continuation planning 25 For financial professional use only – not for use with the public.
Buy-sell agreement § Who will purchase the business interest? § What is a fair price? § When will the sale be made? § Where will the funds come from? 26 For financial professional use only – not for use with the public.
Buy-sell agreements answer the questions Two provisions of a buy-sell agreement § First provision: Someone – the business entity, the surviving owners, or a key employee – will purchase the deceased owner’s interest at an agreed-upon price § Second provision: The deceased owner’s estate is obligated to sell the interest at that price 27 For financial professional use only – not for use with the public.
Buy-sell agreements: Benefits § Help minimize the chance the business falls into the hands of outsiders § Assist the parties involved in agreeing on a value for the business § Help assure that funds will be available to make the purchase § Provide the deceased owner’s estate with needed liquidity § Help assure business continuity for surviving ownership § Provide stability for customers, employees, creditors, and investors 28 For financial professional use only – not for use with the public.
Buy-sell agreements: Three basic types Entity or stock redemption § Allows the business, rather than the individual owners, to purchase a deceased owner’s interest Cross-purchase § Allows the individual owners, rather than the business, to purchase the deceased owner’s interest Wait-and-see § Special agreement between owners of the business and the business itself: Decisions on who purchases the deceased owner’s interest remain uncertain until death, retirement, or disability occurs In any of these situations, your client should consult their tax advisor and attorney. 29 For financial professional use only – not for use with the public.
Taxation of buy-sell agreements: Benefits § Premiums are not tax-deductible § Death benefit proceeds are generally exempt from federal income tax § Surviving shareholders do not get an increase in basis of their stock when a redemption is carried out with entity plan § Surviving shareholders do get an increase in basis of their business interest with cross-purchase § Distributions from a corporation to a shareholder are generally taxed as dividends (ordinary income) with entity plan 30 For financial professional use only – not for use with the public.
Why use life insurance to fund a buy-sell agreement? § Death benefit proceeds assure that adequate funds will be available to help purchase a deceased owner’s business interest § Building an investment or reserve fund takes time § Business may not have adequate funds if owner’s death occurs early, when using an investment or reserve fund Guarantees are backed by the financial strength and claims paying ability of the insurance company. 31 For financial professional use only – not for use with the public.
Why use life insurance to fund a buy-sell agreement? Entity/stock redemption § C corporation, S corporation, and LLC Cross-purchase § Partnership, C corporation, S corporation, and LLC 32 For financial professional use only – not for use with the public.
Buy-sell agreement: Cross – purchase ABC Corporation – $300, 000 $50, 000 death benefit proceeds A ½ of C’s interest C’s estate ½ of C’s interest $50, 000 death benefit proceeds This hypothetical example is provided for illustrative purposes only. 33 For financial professional use only – not for use with the public. B
Buy-sell agreement: Entity purchase ABC Corporation – $300, 000 $100, 000 policy each on A, B, C “The Entity” Sells Liquidation payment A’s estate Sells Liquidation payment B’s estate This hypothetical example is provided for illustrative purposes only. 34 For financial professional use only – not for use with the public. Liquidation payment C’s estate
Buy-sell agreement: Which to use? General rule: As the number of partners increases, the desirability of the entity approach increases because of its simplicity § Cross-purchase requires much more preparation by individual partners § Number of arrangements needed under a cross-purchase is calculated N x (N-1), when N = number of co-owners § Number of arrangements needed under an entity plan: one for each owner § Partners must rely on each others’ ability to maintain funding under a cross-purchase 35 For financial professional use only – not for use with the public.
Buy-sell agreement: Case study Hypothetical scenario: John and Joe own Harrah’s Marina § John and Joe each own 50% of the marina - Harrah’s Marina has a value of $1, 000 § John and Joe would like to set up a buy-sell cross-purchase agreement - John and Joe purchase an Allianz Gen. Dex Survivor® fixed index life insurance policy with the First-to-Die Rider This hypothetical example is provided for illustrative purposes only. These characters are fictional and not an actual Allianz client. 36 For financial professional use only – not for use with the public.
Buy-sell agreement: Case study Here’s an example of how a Gen. Dex Survivor® policy can provide John and Joe with valuable life insurance protection for their families, and also help fund their retirement after 30 years Assumptions § 35 and 38 -year-old-males, Standard Nontobacco § Death benefit = $1, 000 § First to Die Rider for $1, 000 for 35 years § An assumed 8% interest rate is used Based on historical performance, the allocation options available would have returned a wide range of returns. Some would have exceeded 8. 00% and some would have been less than this. Keep in mind that different time periods and different indexes will produce higher or lower averages. The rate of return is based on the caps, participation rates, or spreads in the policy and is subject to change on any policy anniversary based on several external factors including, but not limited to, market volatility, short-term interest rates, and long-term interest yields. See the contract for more details. This hypothetical example is provided for illustrative purposes only. These characters are fictional and not an actual Allianz client. 37 For financial professional use only – not for use with the public.
Important information for the following sales concept Policy loans are not usually subject to income tax unless the policy is classified as a modified endowment contract under IRC Section 7702 A. However, withdrawals or partial surrenders are subject to income tax to the extent that the cash value in the policy immediately before the distribution exceeds the owner’s tax basis in the policy, and if taken prior to age 59½, a 10% federal tax penalty may apply. Policy loans 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. P 52704 and state variations are issued by Allianz Life Insurance Company of North America. 38 For financial professional use only – not for use with the public.
Buy-sell agreement: Case study Gen. Dex Survivor® fixed index universal life insurance policy Assuming 35 - and 38 -year-old males, both Standard Nontobacco. $1, 000 death benefit and a $1, 000 First-to-Die Rider (at an additional cost). 8% illustrated rate. Plus $1, 000 First-to-Die Rider 2 for 30 years Life insurance type $1, 000 Death benefit Gen. Dex Survivor $6, 910 Target annual premium Gen. Dex Survivor $25, 2373 Maximum non-MEC annual premium 30 -year cash surrender value Policy lapses $234, 437 2 (8% illustrated rate) 85 th year (Ages 120 & 123) $03 (2% guaranteed rate and maximum charges) 19 th year (Ages 54 & 57) $2, 171, 743 4 (8% illustrated rate) 85 th year (Ages 120 & 123) $529, 969 3 (2% guaranteed rate and maximum charges) 85 th year (Ages 120 & 123) Based on historical performance, the allocation options, had they been available, would have returned a wide range of interest rates. Some would have exceeded 8% and some would have been less than this. Keep in mind that different time periods and different indexes will produce higher or lower averages. The interest rate is based on the caps, participation rates, or spreads in the policy and is subject to change on any policy anniversary based on several external factors including, but not limited to, market volatility, short-term interest rates, and longterm interest yields. See the contract for more details. This hypothetical example is provided for illustrative purposes only. These characters are fictional and not an actual Allianz client. 39 For financial professional use only – not for use with the public.
Next steps Request your Small-Business Life Insurance Kit. Call the Life Case Design Team at 800. 950. 7372 for details. Discover how small-business life insurance can be “bigger than life” 40 For financial professional use only – not for use with the public.
Thank you. Questions? Call the Life Case Design Team at 800. 950. 7372 (press 1 for Sales Support, then 2 for Life) 41 For financial professional use only – not for use with the public.
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