For Producer or Broker/Dealer Use Only. Not for Public Distribution. Leveraging Life Insurance in Qualified Plans: Bridging the Gap For Producer or Broker/Dealer.

For Producer or Broker/Dealer Use Only. Not for Public Distribution.

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Leveraging Life Insurance in Qualified Plans:

Bridging the Gap



• Identify potential clients and concerns

• The strategy: qualified plans, life insurance and tax deductions

• A case study

• The split-funded plan approach

• Exit strategies

• Action plan

Please note: This document is designed to provide introductory information on the subject matter. MetLife does not provide tax and legal advice. Clients should consult their attorney and /or tax advisor before making financial investment or planning decisions

Agenda


Identify Potential Clients & Concerns


The Client• Older business owner

• Few employees

• Additional retirement savings needed

• Sufficient annual cash flow

• Insurable

• Possible transfer tax concerns


The ConcernIn the first few years I reinvested

everything back into the business.

I am now reaping the rewards of that sacrifice, but I am so far behind in saving for retirement.

I worry I can’t catch up.


In 2012, the maximum 401(k) contribution is $17,000. A business owner with a salary of $300,000 would defer only 5.6% of his or her salary. (i.e. $17,000/$300,000=5.6%) They would experience a retirement gap of around $30,000

17%

11.3%

8.5%

6.8%

5.6%

4.9%


Additional Concerns for Business Owners

• How can I generate larger tax deductions for the business?

• Can I protect my business assets from creditors?

• What will my business be worth when I retire?

• Will my business have to be sold to pay estate taxes?

• How do I provide equal inheritances to my children if they have different levels of interest in the business?


The StrategyQualified Plans, Life Insurance and Tax

Deductions


Defined Benefit Plans

• Predetermined benefit at retirement

• Contributions vary based on performance

• Potential for very large contributions

• Contributions are tax-deductible to the business

• Investment risk is assumed by employer


Consider Life Insurance in a Retirement Plan

• Leverage pre-tax funds to close the retirement gap

• Tax deductions

• Self-completing

• Estate planning

• Substitute business value


How Much Can Be Deducted?

Answer:

It Depends. The purpose of life insurance must remain secondary or “incidental” to the ultimate goal of the plan- retirement income.

What does this mean?


What are the “Incidental” Limits?Defined Contribution

• Less Than Percentage Tests

– Whole Life: Less than 50% of total employer contributions

– Universal or Term: Less than 25% of total employer contributions

• Seasoned Money

• Seeded Money

Defined Benefit

• 100 Times Rule

– Insured’s death benefit may not exceed 100x expected monthly benefit amount

• Revenue Ruling 74-307 (may allow greater life insurance allocation)

– DB plan treated as a hypothetical DC plan for purposes of incidental rules

– An actuary determines hypothetical individual level premium contribution for each participant

– “Less than 50% or 25%" limits are then applied against hypothetical contribution amount for each participant

Please Note: In addition, a contract on a participant's life must be converted to cash or an annuity or distributed to a participant at retirement.


Case Study


Case Study

Concerns

• Retirement income

• Wants greater income tax deductions

• Seeking strategy to replace lost business value at retirement

• Need for additional estate liquidity

Profile

• Occupation: Dentist

• Age 50 (standard nonsmoker)

• Married with children

• 15 years until retirement

• 35% tax bracket

• Significant and steady annual cash flow

• Few employees

Tom


Evaluating the Proposed Strategy

Three most important questions

1. What are the annual “out of pocket” costs?

2. If Tom dies before retiring, how much of the policy’s death benefit will remain tax-free?

3. What is the tax impact if the policy is distributed to Tom at retirement?


Pre-Retirement Tax Costs$1 million policy

$805 $1

365 $190

5

$302

0

For Illustrative Purposes Only.

MetLife Promise Whole Life 120 Age 50 Standard- $19,480 annual premium. Participant in 35% tax bracket

Employee After Tax Out of Pocket Cost


Income Tax Free Death Benefit By Year

For Illustrative Purposes Only.

MetLife Promise Whole Life 120 Age 50 Standard $19,480 annual premium-GuaranteedThis example is for illustration purposes only. Please see full personalized illustration for additional details.

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

50 55 60 65

Subject to Income Tax

Income Tax FreeDeath Benefit

Retirement


At Retirement - Age 65

$275,000 Fair market value of the policy

$ 78,251 Cumulative taxable insurance costs

$196,749

Actual Taxes Paid: $105,639


Summation - Putting the Pieces TogetherPolicy Year Year 1 Year 5 Year 10 Year 15

Insured Age 50 55 60 65

Cash Value $0 $60,000 $164,000 $275,000

Guaranteed Death Benefit $1,000,000 $1,000,000 $1,000,000 $1,000,000

Tax Leverage

Economic Benefit

Taxation of death benefit if death occurs before retirement

Taxation of death benefit if death occurs before retirement

Taxation of policy at exit

Actual Income Tax Paid $805 $1,365 $1,905 $3,020

Income Tax Free Death Benefit $1,000,000 $958,156 $878,753 $803,251

MetLife Whole Life Insurance Age 50 Standard- $20,100 annual premium-GuaranteedThis example is for illustration purposes only. Please see full personalized illustration for additional details


The Split-Fund Plan Approach


The Split-Funded Plan Approach• Benefits funded through a combination of insurance

contracts and investments

• May provide for additional contributions to owners while meeting IRS coverage tests

• Often used in combination with a profit sharing plan


Case Study

Goal

• Increase overall deductions

• Minimize funding costs for employees

Owners

• Richard, age 52

• Jane, age 52

• Both active in business

Richard & JaneBusiness Owners

Existing Profit Sharing Plan

• Maximizes contributions, $50,000 in 2012






Exit Strategies

To ensure the best outcome for the participant, a well designed exit strategy is essential.

Why?When?Tax Impact?Planning Objective?


Exit Strategy Options

1. Liquidation

2. Rollout/distribution

3. Sell the policy to the participant

4. Sell the policy to a Grantor Trust


Exit Strategy #1: Liquidation of the Policy within the Plan

Cash Surrender Value

Considerations:1) No tax implications to participant2) Meets income objective of the plan3) Participant loses life insurance coverage

Qualified PlanInsurance Company

Surrender Policy


Exit Strategy #2: Distribution of Policy from the Plan

Policy

Gift of Policy

Considerations:1) Reduces retirement income from plan2) Fair market value3) 10% premature distribution penalty prior to age 59 ½4) Transfer tax implications

Qualified Plan Participant

ILIT


Exit Strategy #3: Sell the Policy to the Participant

Considerations:1) No 10% penalty 2) Meets income objective of the plan3) Fair market value - No Cumulative

Reportable Economic Benefit (CREB)4) Transfer tax implications

Qualified Plan Participant

ILIT

FMV Purchase

Policy

Gift of Policy


Exit Strategy #4: Sell the Policy to a Grantor Trust

Policy

Gift equal to FMV

Purchase policy for FMV

Considerations:1) No 10% penalty 2) Meets income objective of the plan3) Fair market value (no CREB offset)4) Transfer tax implications

ParticipantQualified Plan

Grantor Trust


Action Plan


The Value of Working with a Third Party Administrator

Benefits for the Trustee

• Actuarial administration and plan valuation

• Legal and compliance oversight ensures tax code validity

• Full Third Party Administration services including documentation and implementation

Benefits for the Producer

• Enables you to enter business owner market with no financial or administrative overhead

• Consultant role with clients, attorneys and CPAs

• May help you increase case size

• Employee statements and communication

• Creating proposals and census administration


Implementing Life Insurance in Qualified Plans

1. Identify and qualify clients2. Schedule time for client meetings and discuss

approach3. Formalize goals, contribution abilities, employee

census and insurability to determine appropriate plan type

4. Work with third party administrator to establish the plan

5. Apply for insurance contracts and determine other investments


MetLife Brand• One of America’s largest financial

companies with roots as far back as 1863• Serves over 90 of the top one hundred

FORTUNE 500® companies*

• Recognized as the Nation’s Largest Life Insurer**

* MetLife. Quick Facts: Full Year 2009** Based on life insurance in-force as of December 31, 2009.


Important Information

Insurance Products are:•Not A Deposit • Not FDIC-Insured • Not Insured By Any Federal Government Agency

• Not Guaranteed By Any Bank Or Credit Union • May Go Down In Value

BDVL21194 L0512259013[0514] © 2012 METLIFE INC. PEANUTS © 2012 Peanuts Worldwide

Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. Your clients should seek advice based on their particular circumstances from an independent tax advisor.

MetLife, its agents and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You clients should consult with and rely on their own independent legal and tax advisers regarding their particular set of facts and circumstances.

Prospectuses for Equity Advantage Variable Universal Life, and for the investment portfolios offered thereunder, are available from MetLife. The policy prospectus contains information about the policies features, risks, charges and expenses. Investors should consider the investment objectives, contract features, risks, charges and expenses of the investment company carefully before investing. The investment objectives, risks and policies of the investment options, as well as other information about the investment options, are described in their respective prospectuses. Clients should read the prospectuses and consider this information carefully before investing. Product availability and features may vary by state.

MetLife life insurance policies have limitations, exclusions, charges, termination provisions and terms for keeping them in force. There is no guarantee that any of the variable investment options in this product will meet its stated goals or objectives. The cash value is subject to market fluctuations so that, when withdrawn, it may be worth more or less than its original value. Guarantees are based on the claims paying ability and financial strength of the issuing insurance company.

Life insurance products are issued by MetLife Investors USA Insurance Company, Metropolitan Life Insurance Company and in New York only, by First MetLife Investors Insurance Company. All guarantees are based on the claims-paying ability and financial strength of the issuing insurance company. Variable products are distributed by MetLife Investors Distribution Company (MetLife Investors), Irvine, CA. May 2012

For Producer or Broker/Dealer Use Only. Not for Public Distribution. Leveraging Life Insurance in Qualified Plans: Bridging the Gap For Producer or Broker/Dealer.

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