Executive Bonus Plans
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Attract. Retain. Succeed. Executive Bonus Plans funded with whole life insurance LI7248 CRN201203-130967
description
The most precious asset of any business is its executive team. Part of the struggle that closely held (and public) companies face is their ability to attract and retain key employees. An executive bonus plan may be an effective strategy to hire away from your competition and keep your top people with your firm.
Transcript of Executive Bonus Plans
Attract. Retain. Succeed.Executive Bonus Plans funded with whole life insurance
LI7248 CRN201203-130967
Presenter
Presentation Notes
Good morning/afternoon/evening. My name is <agent name>, and I’d like to begin with a simple question: How would your business be affected if the employee you depend on the most left you tomorrow to work for your competitor? My guess is that whatever the answer, it’s something you’d rather not have to worry about. Today I’d like to talk to you about how an Executive Bonus Plan can help prevent this problem from arising and maintain the success of your business.
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Important Information
The information provided is not written or intended as specific tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
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Agenda
A critical business challenge
What do executives want?
Executive Bonus Plans…
A simple & effective solution
Presenter
Presentation Notes
Our agenda is simple: First we’ll address some of the challenges facing many businesses like yours; Then we’ll talk about what most executives are looking for; And finally we’ll go over a simple and effective solution for both.
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Attracting and retaining talent
How critical are top performers to your success?
How do you attract them?
How do you lock them into your business?
Presenter
Presentation Notes
Let’s begin by talking about a specific challenge of a typical small business. If your company is like most, its success is often attributable to the efforts and abilities of a select group of key employees or executives. That is why it is essential to hire and retain talented, hard-working individuals who can help your business prosper and grow. We’ve already established that some level of success that your business achieves depends on some key people. In what ways do you attract talent today? - Pause - Maybe a better question, what have you done to help tie them to your business? What would they forfeit if they left you to work for your main competitor? - Pause again before moving to the next slide -
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Rewarding talent
How do you reward top performers?
What additional “selective” benefits have you considered offering?
Profit sharing? -- Supplemental Executive Retirement Plan?Non-Qualified Deferred Compensation? -- Incentive stock?
High admin expense?
Too complex?
Presenter
Presentation Notes
Rewarding your best people is great way to keep them with you. How do you reward your top performers? Do you use cash bonuses, or give them raises? You can certainly do that, but in many cases, that employee will probably go out and buy a new car, or maybe remodel the kitchen. And in a few years, he or she doesn’t even remember getting that bonus. Besides, isn’t that also something your competitors can provide? In order to differentiate their organization in the market, businesses need to offer additional “selective” benefits to help attract and retain talented executives. These may include a variety of insurance and non-insurance related programs that are often offered exclusively to key people in the organization. What additional “selective” benefits are you offering to your best people? This may include things like a profit-sharing plan, Supplemental Executive Retirement Plan (SERP), non-qualified deferred compensation (NQDC), and incentive stock. - Pause - If you’re not offering these, the reason may be that: the cost is prohibitive and administrative expenses are too high You might perceive them as being too complex or they may just be impractical or inflexible Now I’ll ask you to please hold that thought.
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Savings burden
and…
Investment risk
shifted to employees…
Defined benefit pension plans face extinction
Presenter
Presentation Notes
Let’s change gears and talk a little about our second agenda item – What executives want and need. More specifically, their needs and wants as they relate to expectations of their standard of living in retirement. You can see here that in 1988, 22.2 million workers were covered by employer-funded defined benefit pension plans with guaranteed, specified lifetime income benefits. By 2005 that number had fallen to 16.2 million. Even more telling is the decline in the number of single employer defined benefit plans, which decreased from over 112,000 in 1985 to less than 29,000 in 2005. Let’s face it – defined benefit plans are an expensive benefit for employers to provide. As this type of pension plan coverage has declined, retirement funding has gradually moved from an emphasis on employer-paid defined benefit pension plans to employee-funded defined contribution pension plans like 401(k) plans. These plans require employees to take on the primary burden of funding. In general, 401(k) plans are only partially funded by employers, and some have curtailed their contributions all together. The government also limits how much individuals can contribute to their 401(k) plans each year, making it even more difficult to save for retirement. Clearly, the responsibility of saving for retirement has shifted more toward the retiree. Along with the burden of funding more of their retirement income, individuals are also responsible for investing their retirement assets —and bearing more of the investment risk than in the past.
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ConsumptionEpidemic…?
Americans saving less
For additional information on how this statistic is calculated, go to www.bea.gov.
Presenter
Presentation Notes
What about personal savings? In recent years Americans have been saving less than ever before. According to the U.S. Department of Commerce, Bureau of Economic Analysis, the personal saving rate has been in a steady decline since the 1980s and actually fell to or below zero percent three times in the last eight years; most recently in 2008. Note – Keep in mind that the Personal Saving Rate is basically a measure of difference between earnings and spending. For additional information on how this statistic is calculated, go to www.bea.gov.
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Compensation Discrimination
at higher incomes
How will your executives live on 20% of their income in retirement?
How will you?
Emerging affluent in need
Presenter
Presentation Notes
Affluent and emerging affluent individuals planning for retirement also face another problem called “compensation discrimination.” This refers to the fact that the higher your pre-retirement income, the lower the percentage of that income that will be replaced by Social Security. Most individuals will need income equal to 75% to 85% of their pre-retirement income during retirement. Yet projected Social Security benefits replace a lower percentage of earnings for individuals earning higher incomes than for lower wage earners. Combine this with the contribution limits forced on individuals that we just discussed, and the outlook is grim. This chart illustrates the projected Social Security retirement benefits at various levels of income. If your employees earn in the neighborhood of $150,000 annually, how will they retire on 20% their pre-retirement income? How will you do it?
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Other factors
Longer life spans
Uncertainty surrounding the future of Medicare and the overall cost of health care
The impact of market volatility on retirement account balances
Presenter
Presentation Notes
There are also some other socioeconomic and demographic trends that have made it more important than ever to prepare financially for retirement. • We’ve all heard that people are living longer than ever before. Today’s retirees worry that they will outlive their income, or that they will not leave enough to a surviving spouse or their children. • There is great uncertainty surrounding the future of Medicare and the overall cost of healthcare, and as people grow older, the need for health care and long-term care services may increase. • Market volatility can have a long term impact on retirement account balances.
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Executives need YOUR help!
They feel that retirement savings programs are the most valuable benefits a company can provide
They also rely on their employer for over half of their life insurance coverage
SOURCE: The Value of Executive Benefits, LIMRA 2006
Most Valued Benefits to Executives
71%
15%
14%
OtherStock OptionsRetirement Plans
Presenter
Presentation Notes
What all of this means is that more of the responsibility for funding a secure retirement has fallen to the individual. Those earning higher incomes have a greater need to save for retirement. At the same time that Americans are spending more and saving less, they are living longer than ever before, which means they need to make their retirement savings last longer. Considering all this, it’s safe to say that executive’s need your help as their employer. They feel that retirement savings programs are the most valuable benefits a company can provide. Executives also rely on their employer for over 50% of their life insurance coverage. - Pause before moving to the next slide - Source: The Value of Executive Benefits, LIMRA 2006
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The executive bonus solution
What is an Executive Bonus Plan?
A fringe benefit funded with whole life insurance
Provided to a select group of key executives and/or business owners
Helps provide protection during working years
Helps provide supplemental income1 during retirement
1 Distributions under the policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain, and if the owner is under 59 ½ the distribution is also subject to a 10% tax penalty. Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
Presenter
Presentation Notes
So let’s talk about a simple and effective solution that not only solves the challenge that businesses have in attracting, retaining, and rewarding; it also resolves the key challenges facing executives. An Executive Bonus Plan is a fringe benefit, funded with life insurance, that’s given to a select group of key employees and/or business owners. In addition to providing protection to the executive’s family during working years, an Executive Bonus Plan funded with whole life insurance can provide tax-advantaged supplemental retirement income. You should be aware that distributions under the policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain, and if the owner is under 59 ½ the distribution is also subject to a 10% tax penalty. Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
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How does it work?
Presenter
Presentation Notes
Let’s talk briefly about how executive bonus plans work. A basic executive bonus plan is structured as follows: Business enters into a bonus agreement with each covered executive Executive applies for and owns the whole life policy Business pays all or a portion of the annual policy premium as a bonus Executive pays the income taxes on the bonus amount each year This diagram illustrates how the plan works.
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What are the benefits?
To the businessEffective recruiting and retention toolA selective benefitEasy to implement and administerImmediate income-tax deduction
To the executiveOwned by executiveGenerally income tax-free death benefitTax-advantaged growth and access to cash1
Presenter
Presentation Notes
Now that you understand more about how bonus plans work, we’ll discuss their benefits in more detail. For the business: • An executive bonus plan can be an effective recruiting and retention tool that provides benefits over and above the standard compensation package. The business may offer the benefit to a select group of employees on a discretionary basis. It can also vary the insurance coverage and premium bonus by employee. This allows you to design a plan that appropriately rewards your most valuable executives. In comparison to some other types of plans, Executive Bonus Plans are relatively easy to set-up and maintain. Bonus plans offer a straightforward design based on a simple agreement between the business and executive, so there are minimal implementation and administrative expenses. A basic plan does not require IRS approval and there are no required ERISA filings. Bonus payments provide an immediate income tax deduction to the business, subject to applicable compensation limits. As for benefits to the executive: The executive owns the life insurance policy, so he or she names the policy beneficiary. This also means that the policy cash values cannot be forfeited to the business unless the policy has been pledged to secure a loan. Additionally, in many states, personally owned life insurance policy cash values are exempt from the claims of creditors, which may be an important feature if the business is involved in activities where personal liability is a concern. The policy death benefit will be paid income tax-free to the beneficiaries named by the executive. This can reduce or eliminate the need for the executive to purchase life insurance on their own, and can be an effective way to provide life insurance coverage for income protection during working years or estate planning. Whole life policies will build cash value over time. These values offer a source of cash that may be used to meet pre-retirement needs and/or to provide supplemental income during retirement. Whole life policy cash values accrue tax-deferred, and can be accessed on a tax-advantaged basis.
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Plans can be designed…
To reward top performers
To address retirement and protection needs
To help minimize or eliminate the executive’s after-tax costs
So bonuses can create a strong incentive to staywith your company
To stay within your budget
Presenter
Presentation Notes
Executive Bonus Plans also offer a great deal of flexibility and can be tailored specifically to meet your objectives. For example, plans designs can be altered in different ways: If you’re looking for a plan that will rewards top performers, you can build that into a plan; You can customize the plan to address either retirement or protection needs for the executive, or you can create one that will satisfy both; You can choose to minimize or eliminate the executive’s after-tax costs; It’s up to if it makes more sense for the executive to have some skin in the game. You can create varying levels of incentives. It may be enough incentive to continue premiums bonuses until retirement, or you may prefer to create a level of restriction through leveraged or restrictive bonus arrangements. We can select a plan design that accomplishes your goals, and that also stays within your budget.
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Businesses need a simple, effective, and flexible way to attract, retain, and reward
Executives are looking to their employers for helpAdditional sources of retirement income1
Life insurance protection
Executive Bonus Plans offer a simple and effective solution to both business and executives
Wrap Up
Presenter
Presentation Notes
To recap: If you’re a small business owner who depends on the efforts of your best people, you need to provide strong incentive for those people to stay with you as opposed to going to work for a competitor. You’re more likely to offer an additional selective benefit if it’s simple, effective, and flexible. Executives are more likely to stay if you provide something that they value and can’t get from your competitors. They value additional sources of retirement income the most, and depend on their employer for over 50% of their life insurance. This makes Executive Bonus Plans a simple and effective solution for both businesses and executives by allowing the business to provide an alternate source of retirement income, and the additional life insurance protection that executives need.
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Next steps
Confidential Business Profile
Establish objectives to address your needs
Select a time to review a plan proposal
Presenter
Presentation Notes
These are the steps we can take to help you/businesses (if in a group setting) determine if an Executive Bonus Plan is right for you/their business: Let’s complete a confidential business profile; Then we can discuss the objectives for your business plan so that I can better understand how to address your particular needs; We’ll also make a follow-up appointment within a couple weeks so that we can go over a proposal that I put together based on the information you provide. Thank you for you time. Do you have any questions before we begin?
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