For producer use only. Not for presentation to the public. OLA 1290 0209 Is There Still Life in...
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Transcript of For producer use only. Not for presentation to the public. OLA 1290 0209 Is There Still Life in...
For producer use only. Not for presentation to the public.OLA 1290 0209
Is There Still Life in These Plans?
2 For producer use only. Not for presentation to the public.
This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here.
3 For producer use only. Not for presentation to the public.
Why 412(e)(3) Now?
Uncertain economic climate
Clients leery of investing solely in stocks or bonds
Desire for guaranteed retirement income
Favorable Pension Reform: EGTRRA 2001
compensation/contribution limit changes
no plan aggregation
no family aggregation
4 For producer use only. Not for presentation to the public.
2005 2006 2007 2008 2009CompensationIRC 401(a)(17)
$210,000 $220,000 $225,000 $230,000 $245,000
Annual Benefit IRC 415
100% of pay not to exceed $170,000. Reduced if benefit starts before age 62.
100% of pay not to exceed $175,000. Reduced if benefit starts before age 62.
100% of pay not to exceed $180,000. Reduced if benefit starts before age 62.
100% of pay not to exceed $185,000. Reduced if benefit starts before age 62.
100% of pay not to exceed $195,000. Reduced if benefit starts before age 62.
EGTRRA Increases Compensationand Benefit Limitations
5 For producer use only. Not for presentation to the public.
What Is a Section 412(e)(3) Plan?
Defined benefit qualified retirement plan
Funded exclusively with guaranteed insurance products
Level annual funding is required
Plan benefits equal contract benefits
Exempt from usual defined benefit plan minimum funding requirements
Contributions based on present value of future benefits
6 For producer use only. Not for presentation to the public.
Investment Options
Annuity-only option
Annuity and life insurance option
Contract selection does not change benefit
Life insurance adds family security
7 For producer use only. Not for presentation to the public.
Benefits of a 412(e)(3) Plan
Maximize contributions and deductions
Limit complexities of traditional defined benefit plans
Minimize market risk
Benefits can increase over time—which can help offset effects of inflation
8 For producer use only. Not for presentation to the public.
Traditional Plan 412(e)(3) Plan
Limited early contributions Larger upfront contributions
May become over-/underfunded Always fully funded
Quarterly contribution deadlines Funding extended to tax filing deadline
Traditional Defined Benefit vs. 412(e)(3) Fully Insured Plan
9 For producer use only. Not for presentation to the public.
Traditional Defined Benefit
412(e)(3) Plan
Cash at Age 65 $2,206, 088 $3,796,729
Interest Assumption 5% 3%
Actuarial Mortality Current Guaranteed
Normal Retirement Age Reasonable Reasonable
Calculations provided by The Heritage Group, LLC. Assumes plan participant is 50 years old. Funding for maximum retirement benefit allowed at age 65.Participant’s compensation in all years is in excess of $245,000.
Defined Benefit Plan vs.412(e)(3) Plan Comparisons
10 For producer use only. Not for presentation to the public.
GATT vs. Lump Sum Monitoring
Limits imposed by Congress
Look at current IRS interest rates to determine presentvalue of annuity
Interest rates change annually
412(e)(3) vs. traditional defined benefit plan—reach GATT limit earlier
Choice to annuitize 412(e)(3) or roll over lump sum depends on a variety of planning factors
11 For producer use only. Not for presentation to the public.
Guaranteed Returns—Why Bother?
“Why should someone consider a guaranteedlife insurance policy and annuity vehicle for retirement?”
For Clients
Larger upfront tax deductions with guaranteed benefits
For Advisors
Possible opportunity for long-term money management
12 For producer use only. Not for presentation to the public.
Transamerica’s Approach to a 412(e)(3) Plan Offers Planning Flexibility Life insurance is no longer needed
Life insurance is needed
receive policy as plan distribution
roll life insurance policy into profit-sharing plan
purchase life insurance policy from profit-sharing plan
Change the policy to meet new objectives
buy spousal protection for estate planning
keep individual insurance protection
13 For producer use only. Not for presentation to the public.
TransFreedom® II (Form AF715 101 186 104) is a flexible premium deferred fixed annuity issued by Transamerica Life Insurance Company, Cedar Rapids, IA 52499. Contract form and number may vary, and this contract may not be available in all jurisdictions.
Life Insurance ProtectionNo Longer Needed
Plan Participant Retires or Separates from Service
14 For producer use only. Not for presentation to the public.
When Life Insurance Is Needed
Plan participant Retires or Separates from Service—Receives the Policy as a Plan Distribution
Policy transferred as plan distribution
Income tax paid on fair market value of policy less taxable economic benefit
15 For producer use only. Not for presentation to the public.
When Life Insurance Is Needed (Cont’d)
Plan Participant Retires or Separates from Service—Roll the Life Insurance Policy to a Profit-Sharing Plan (PSP)
Policy transferred directly to PSP
Not a taxable distribution
16 For producer use only. Not for presentation to the public.
When Life Insurance Is Needed (Cont’d)
Plan Participant Retires or Separates from Service— Purchases the Policy from the Profit-Sharing Plan
® ® ®
17 For producer use only. Not for presentation to the public.
TransSecure® II and TransSecure® II NY — Flexible for 412(e)(3) and Beyond
Current company practice
ISWL policy can be surrendered
cash surrender value rolls into profit-sharing plan or IRA
For same net amount at risk, Transamerica may issue new second-to-die universal life policy
No evidence of insurability required on former plan participant
18 For producer use only. Not for presentation to the public.
TransSecure® II (Policy Form #1-18011108, #ICC08-180) and Transecure® II NY (Policy Form #3-18038108) are nonparticipating, limited payment, fixed premium, interest-sensitive, whole life insurance policies issued by Transamerica Life Insurance Company, Cedar Rapids, IA 52499 or Transamerica Financial Life Insurance Company, Purchase, NY 10577. Policy forms and numbers may vary, and these policies may not be available in all jurisdictions. In most states, in the event of suicide during the first two policy years, death benefits are limited only to the return of premiums paid. In Missouri, suicide is no defense to payment of benefits unless the Company can show that the insured intended suicide at the time of application for coverage.
TransSecure® II and TransSecure® II NY — Flexible for 412(e)(3) and Beyond (Cont’d)
Evidence required on spouse’s life
Owner can be irrevocable trust so death benefit avoids estate inclusion
Cost of insurance based on insured’s current age—subject to new surrender charges
New compensation
Offered by company practice
19 For producer use only. Not for presentation to the public.
TransSecure® II and TransSecure® II NY — Flexible for 412(e)(3) and Beyond (Cont’d)
Buying Spousal Protection for Estate Planning
20 For producer use only. Not for presentation to the public.
TransSecure® II and TransSecure® II NY — Flexible for 412(e)(3) and Beyond (Cont’d)
Single Life (offered by company practice)
Available when policy is no longer part of 412(e)(3) plan and is surrendered
Available beginning the 8th policy year
Insured’s age and surrender charge period remain unchanged
May roll cash surrender value into profit-sharing plan or IRA
New premium must be paid to prevent policy lapse
New death benefit will be net amount at risk
21 For producer use only. Not for presentation to the public.
The Role of a Third-Party Administrator
Develops suitable 412(e)(3) plan proposal
Assists in preparation of plan documents
Annual administration
calculates plan contributions
performs incidental benefits testing
prepares required reports
handles distributions
22 For producer use only. Not for presentation to the public.
Planning Considerations
There is a huge tax bill accruing on the backside of the 412(e)(3) plan—all we’re doing is deferring taxes
23 For producer use only. Not for presentation to the public.
Planning Considerations (Cont’d)
What makes Transamerica’s approach to Section 412(e)(3) plans safer than those offered by the competition now that the IRS issued regulations that will change the valuation of life insurance policies?
24 For producer use only. Not for presentation to the public.
IRS Guidance on Valuationof Life Insurance Valuation
Notice 2005-25
Modifies and supersedes 2004-16
Provides guidance on fair market value oflife insurance policies
Provides safe harbor formula
25 For producer use only. Not for presentation to the public.
Who Might Benefit from a412(e)(3) Plan? The best candidates for a 412(e)(3) plan might be:
Highly paid business owners and professionals:
looking to maximize tax deductions
who can make a multiple-year commitment; and/or
who prefer security and guarantees over a fluctuating stock market
Smaller, closely held businesses
Companies with few or no common law employees
S corporation owners with W-2 salary
Independent contractors
Companies with larger employee groups wishing to create definedbenefit “carve-out” plans
26 For producer use only. Not for presentation to the public.
412(e)(3) Summary
Enhanced retirement benefits
Enhanced contributions/deductions
Enhanced security
27 For producer use only. Not for presentation to the public.
Professional Advice
Professional advice is critical
Tax, ERISA, and legal counsel
Risk/benefit analysis
Financial projections
Careful drafting
28 For producer use only. Not for presentation to the public.
Transamerica Life Insurance Company, Transamerica Financial Life Insurance Company (collectively “Transamerica”), and their representatives do not give ERISA, tax, or legal advice. This presentation is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must consult with and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here.
Discussions of the various planning strategies and issues are based on our understanding of the applicable federal income, gift, and estate tax laws in effect at the time of this presentation. However, tax laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Transamerica’s interpretations. Additionally, this material does not take into consideration the general tax and ERISA provisions applicable to defined benefit retirement plans or the impact of applicable state laws on clients and prospects.
Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and liability with respect to it. This information is current as of February 2009.
For producer use only. Not for presentation to the public.OLA 1290 0209
Is There Still Life in These Plans?