[Joe Sample,][Designations per field stationery guidelines][Company Approved Title][Firm Name] [The Prudential Insurance Company of America][if Agency Distribution][1234 Main Street, Suite 1,][Anywhere], [ST] [12345][in required states] [<ST> Insurance License Number <1234567890>][Phone] [123-123-1234] Fax [123-123-1245] [[email protected]]]
Executive AdvantageLife Insurance in Retirement Planning for the Small Business Owner
0262951-00002-00 Ed. 10/2015 Exp. 04/15/2017
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Agenda
Challenges & Opportunities
Strategies
Execute for Results
All guarantees within the policy are based on the claims-paying ability of the issuing company. Broker/dealers, insurance agencies and their affiliates who sell the policy make no representations or guarantees regarding such ability.
Life insurance policies contain fees and expenses, including cost of insurance, administrative fees, premium loads, surrender charges and other charges or fees that will impact policy values. Variable universal life insurance involves investment risk, including possible loss of principal. Both the investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost.
There are complex legal and tax implications associated with the various strategies illustrated, and your client must consult their own tax and/or legal advisors to determine whether or not any plan or strategy illustrated is appropriate for them.
Effective planning requires that your client consult with their own attorney. Prudential representatives are not authorized to practice law or to provide legal or tax advice. The material contained in any illustration is not a substitute for consultation with a competent legal advisor and should only be relied upon in conjunction with his or her advice.
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What are the concerns facing small business owners?
• Day-to-day business operations• Reduce taxes• Care for self (retirement planning)• Care for family (income protection, estate planning)• Retain key employees• Business continuation / Exit strategies
Challenges & Opportunities
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Source: “The Most Profitable Types of Small Businesses.” Entrepreneur Magazine, August 14, 2014. This statistic is believed to be the most up to date available as of September,2015.
Challenges & Opportunities•Top five most profitable types of small businesses according to Entrepreneur Magazine
TypeAverage pre-tax
margin
Certified Public Accountants
20.0%
Oil & Gas Extraction 19.2%
Commercial Equipment LeasingLegal ServicesReal Estate Agents and Brokers
17.7%16.5%14.8%
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Client• Stan Rich, age 45, owner• Rich Dry Cleaning, LLC• Strong, stable cash flow• Provides a SIMPLE IRA• High concentration of personal
wealth tied up in the business• Risk averse to full market
exposure
Goals• Death benefit for family • Exclusive retirement benefit for
himself to help diversify wealth• Tax-advantages, no equity
exposure
This is a hypothetical example used for illustrative purposes only to describe how the strategies may work. Which strategy works best for clients will depend on their individual facts and circumstances. Actual results will vary. Any representation of life insurance premium or death benefit is purely hypothetical in amount and is not a guarantee of cost or death benefit now or in the future from a specific life insurance policy.
Strategy: Owner Executive Advantage
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Strategy• Universal Life Insurance• Policy owned by business
owner• Funded after-tax from business’
net earnings (LLC)• Structured for optimal cash
value
Design• PruLife® Founders Plus UL• $20,000 annual premium to age 65• Minimum non-MEC face amount• ROA switch to level• Withdrawals and loans ages 66-85
Additional policy assumptions: male, age 45, preferred non-tobacco, minimum initial face amount of $421,053. $1,000,000 cash surrender value at age 121. Based on non-guaranteed interest rate and non guaranteed policy charges.
Strategy: Owner Executive Advantage
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Both loans and withdrawals from a permanent life insurance policy may be subject to penalties and fees and, along with any accrued loan interest, will reduce the policy's account value and death benefit. Assuming a policy is not a Modified Endowment Contract (MEC), withdrawals generally are taxed only to the extent that they exceed the policyowner’s cost basis in the policy and usually loans are free from current federal taxation. A policy loan could result in tax consequences if the policy lapses or is surrendered while a loan is outstanding. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10% additional tax prior to age 59 1/2, with certain exceptions.
Strategy: Owner Executive Advantage
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0k
200,000k
400,000k
600,000k
800,000k
1,000,000k
1,200,000kAge 85 Values:
$165,753
Total Federal Tax-Free Income(Annual Distributions)
Net Death Benefit
Cash Surrender Value
Total Premiums
($45,016 per year)
$1,065,109
$204,193
$400,000
$900,320
Attained Age
Clients must obtain a personalized illustration for any product considered for use in conjunction with this strategy. The performance, costs, features, and risks of each product will differ. All values shown were derived from an illustration and are based on non-guaranteed interest rates and policy charges which are subject to change at any time and for any reason by the insurance company. Tax-free income assumes policy never becomes a Modified Endowment Contract and remains in force until death. An income tax rate of 35% is assumed. This is not a complete illustration for PruLife® Founders Plus UL. This graph is demonstrating the Plus 100 Account. You should prepare a personalized illustration that will show the impact of guaranteed interest rates and guaranteed charges for your clients when discussing a product’s benefits and features.
Strategy: Owner Executive Advantage
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Federal income- tax-
free death benefit
*Refer to IRC
101 (a)
Tax-deferred cash value growth
No 59½ restrictions or 70½ RMDs
No premium limits1
Potentially tax-free
supplemental retirement
income2
Not subject to tax qualificationlimits
Benefits of a life insurance policy to the owner:
1Assumes the policy qualifies as life insurance under IRC §7702 and satisfies the TAMRA (7-Pay) test and Guideline Premium Test
2Both loans and withdrawals from a permanent life insurance policy may be subject to penalties and fees and, along with any accrued loan interest, will reduce the policy's account value and death benefit.
Strategy: Owner Executive Advantage
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Considerations• Loans and withdrawals will reduce the policy’s death benefit• Withdrawals in the first 15 policy years may have adverse tax
consequences*• Policy gains become fully taxable if policy lapses• Must pay a sufficient amount of premiums to keep policy in force• Exposure to market volatility if variable life is used
* IRC Section 7702(f)(7) (B-C) retests life insurance contract withdrawals and face reductions and may cause adverse income tax consequences.
Strategy: Owner Executive Advantage
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Client• Alan Man, age 52, owner• Man Hydraulics International, Inc.• Successful fluid parts
manufacturer• Provides a Safe Harbor 401k• Key employee: Lead Engineer,
age 45
Goals• Selective benefit to reward
performance of Lead Engineer• Golden handcuff to help keep
Lead Engineer with the company
• Simple implementation with easy administration
• Tax deduction for business
This is a hypothetical example used for illustrative purposes only to describe how the strategies may work. Which strategy works best for clients will depend on their individual facts and circumstances. Actual results will vary. Any representation of life insurance premium or death benefit is purely hypothetical in amount and is not a guarantee of cost or death benefit now or in the future from a specific life insurance policy.
Strategy: Executive Advantage for Employee
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Strategy• Variable Universal Life• Policy owned by key employee • Section 162 Bonus (gross-up)• Restricted Policy Agreement
(Golden Handcuffs)• 10% per year vesting schedule• Structured for optimal cash
value
Design• PruLife® Custom Premier II• $20,000 annual premium to age
65• Minimum non-MEC face amount• ROA switch to level• Withdrawals and loans ages 66-
85• 7% hypothetical gross rate of
return
Additional policy assumptions: male, age 45, preferred non-nicotine, initial face amount $421,053 solve for $443,158 cash surrender value at age 100. Based on non-guaranteed interest rate and non guaranteed policy charges.
Strategy: Executive Advantage for Employee
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Strategy: Executive Advantage for Employee
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Mechanics of IRC Section 162 Bonus and Restrictive Agreement
• ER bonuses premium to EE, taxable to EE, deductible to ER if reasonable compensation
• EE uses bonus to pay premiums• EE owns policy/ ER has no interest in policy• Restrictive Agreement between ER and EE can restrict access to
cash values (Golden Handcuffs)• ER may not recover its outlay if EE leaves
Strategy: Executive Advantage for Employee
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0k
200,000k
400,000k
600,000k
800,000k
1,000,000k
1,200,000k
1,400,000k Age 85 Values:
$177,894
Total EE Federal Tax-Free Income(Distributions via policy loans and withdrawals)
Net Death Benefit
EE Accessible Cash Surrender Value
Total ER After-TaxCost*
($59,748 per year)
$1,148,740
$128,793
$400,000
$1,194,960
Attained Age
Total EE After-TaxCost*
$0
*The Total ER After-Tax Cost represents the net cost after income tax savings or income taxes paid are applied on deductible bonus amounts using an income tax rate of 35% for both ER and EE. “EE” = Employee, “ER” = Employer. All values shown were derived from an illustration and are hypothetical. Actual results will be more or less favorable. Tax-free income assumes policy never becomes a Modified Endowment Contract and remains in force until death.
You must provide your client with a personalized illustration, which includes the impact of a 0% investment performance and guaranteed charges when selling a variable universal life insurance product from Prudential. T his is not a complete illustration for PruLife®Custom Premier II. You should prepare a personalized illustration that will show the impact of guaranteed interest rates and guaranteed charges for your clients when discussing a product’s benefits and features.
Age 65 Age 75 Age 85 Age 95IRR on Cash Surrender Value:5.40%5.82% 5.91% 5.87%IRR on Net Death Benefit: 9.24% 6.03% 6.01% 5.88%
Gross Rate of Return:
7.0% (6.32% net)
Strategy: Executive Advantage for Employee
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All values shown were derived from an illustration and are hypothetical. Actual results will be more or less favorable. Tax-free income assumes policy never becomes a Modified Endowment Contract and remains in force until death.
You must provide your client with a personalized illustration, which includes the impact of a 0% investment performance and guaranteed charges when selling a variable universal life insurance product from Prudential. This is not a complete illustration for PruLife® Cusrom Premier II. You should prepare a personalized illustration that will show the impact of guaranteed interest rates and guaranteed charges for your clients when discussing a product’s benefits and features.
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0k
200,000k
400,000k
600,000k
800,000k
1,000,000k
1,200,000k Age 69 Values:
Total Federal Tax-Free Income(Distributions via policy loans and withdrawals)
Net Death Benefit
Cash Surrender Value
Total Premiums
($59,748 for 2 years plus $27,225 for
year 3)
$400,000
$146,721
Attained Age
Performance based on 0% rate of return and Maximum Policy Charges
Policy Lapse at age 68:
Cash surrender value – $0Net Death Benefit – $0
Strategy: Executive Advantage for Employee
Age 65 Age 75 Age 85 Age 95IRR on Cash Surrender Value:NA NA NA NAIRR on Net Death Benefit: NA NA NA NA
Gross Rate of Return:
0.0% (-1.03% net)
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Potential Benefits to EE:
Generally Income tax-
free death benefit
Tax-deferred cash value growth potential
Flexibility, control and portability
Income tax-free supplemental
retirement income
Cost-effective way to obtain life insurance
Potential Benefits to ER:
Tax-deductible to the business
Targets only specific individuals
No ERISA requirements
“Golden handcuffs”
Control, possible cost recovery (if restricted)
Strategy: Executive Advantage for Employee
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Considerations• Section 162 Bonuses are taxable income to employee• Loans and withdrawals will reduce the policy’s death benefit• Withdrawals in the first 15 policy years may have adverse tax
consequences*• Policy gains become fully taxable if policy lapses• Must pay a sufficient amount of premiums to keep policy inforce• Exposure to market volatility if variable life is used
* IRC Section 7702(f)(7)(B-C) retests life insurance contract withdrawals and face reductions and may cause adverse income tax consequences.
Strategy: Executive Advantage for Employee
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Ideal Prospects
• General characteristics• Mature, established
businesses• Typically under 100
employees• Strong and positive cash flow• Virtually any type or industry
Profitable Industries*• Accounting, Tax Preparation• Real Estate Leasing• Automotive Equip. Rental and
Leasing• Dental Offices• Legal Services• Other Health Practitioners• Real Estate Agents and Brokers
*Source: “The Most Profitable Industries in the U.S.,” sageworks.com, Press Articles, September 8, 2015. This statistic is the most up to date available as of October 2015.
Executing For Results
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Discovery Questions– Prospecting questions– Fact-based questions
Supplemental Illustrations– Life insurance in retirement planning– Traditional Section 162 Bonus Plan
Executing For Results
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Thank You… Questions?
PruLife® Founders Plus UL and PruLife Customer Premier issued by Pruco Life Insurance Company in all states except New York, where if available it is issued by Pruco Life Insurance Company of New Jersey, both are Prudential Financial companies located in Newark, NJ.
PruLife® Custom Premier II is offered through Pruco Securities, LLC (Member SIPC) a Prudential Financial subsidiary, 751 Broad Street, Newark, NJ 07102-3777.
Your client should consider the investment objectives, risks, and charges and expenses carefully before investing in the contract and/or underlying portfolios. The prospectus and, if available, the summary prospectus, contains this information as well as other important information. A copy of the prospectus (es) may be obtained from prudential.com. Your clients should read the prospectus(es) carefully before investing.
It is possible to lose money by investing in securities.