Select the choice that best describes the business owner you are working with:


Select the primary area of focus for the business owner you are working with:


Select the item that is most important to the employer:


Cross Endorsement Buy-Sell (CEBS)

Based on your responses, you may want to consider a cross endorsement buy-sell (CEBS) arrangement.

How it Works

1. Each owner purchases a life insurance policy on their own life and endorses some or all of the death benefit to the other owners to satisfy buy-sell obligations.

2. Each owner also collects a rental fee (aka “economic benefit” charge) associated with the endorsed death benefit.

3. At death, the surviving owners receive insurance proceeds to satisfy the buy-sell obligations. Any remaining death benefit will be paid to the insured’s family.

4. If an owner retires, the endorsement can be removed, leaving the owner with control and access to the policy for personal planning purposes.

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A cross endorsement buy-sell arrangement is a unique type of buy-sell arrangement that allows clients to fulfill their agreement under a buy-sell plan while owning a policy on his/her own life (instead of each owner buying a life insurance policy on the lives of the co-owners as in a traditional cross purchase plan). This type of arrangement offers increased flexibility as new owners enter the business and others retire and allows retiring owners to maintain their life insurance coverage without having to buy back policies from the other owners.

Another benefit of this type of funding arrangement is the ability of the business owner to customize the life policy to meet personal planning goals in addition to fulfilling the buy-sell obligation. The permanent life insurance could provide additional death benefit protection for the family (i.e. only a portion of the policy will be endorsed to cover buy-sell needs) and other living benefits such as LTC coverage, supplemental income, etc.

One Way Buy-Sell

Based on your responses, you may want to consider a one way buy-sell plan.

How it Works

 

1. Business owner enters into an agreement with key person where key person will buy business at the owner’s death.

2. Key employee buys a life insurance policy with business owner as insured.

3. At owner’s death, key employee receives the life insurance proceeds.

4. Key employee buys the business from the owner’s estate, and the owner’s family receives cash.

 

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A one way buy-sell plan is used when a non-owner of the business, such as a key employee, agrees to buy the business upon a triggering event, such as disability, retirement, or death. This design is typically used when there is only one business owner and one designated buyer of the business.   

The designated buyer typically will purchase a life insurance policy on the owner’s life and will use the death proceeds to buy the business at the insured’s death. Because the designated buyer is usually someone close to the business owner – e.g., a key employee and/or family member – funding for the policy may come, at least in part, from the business itself via a bonus plan or split dollar arrangement.

 

Entity-Purchase Buy-Sell

Based on your responses, you may want to consider an entity purchase buy-sell plan.

How it Works

1. Business owners enter into agreement where business will buy out a business owner at death (or other triggering event).

2. Business buys life insurance on the business owners.

3. At an owner’s death, insurance proceeds are paid to the business.

4. The business purchases business interests from the decedent’s estate, and decedent’s family receives cash.

 

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An entity-purchase buy-sell plan (aka a “stock redemption” agreement) is an arrangement between a business entity and each owner whereby the business agrees to buy the owner’s interest upon a triggering event, such as disability, retirement, or death. By implementing the plan, each owner is assured that there will be a guaranteed buyer for his/her share of the business. This protects the remaining owners from a sale of that interest to an unknown third party.

Life insurance is an excellent funding vehicle for this type of buy-sell arrangement because the business will receive the death benefit proceeds income tax free and any potential cash value inside of the policy grows tax-deferred. 

 

Trusteed Cross Purchase Buy-Sell

Based on your responses, you may want to consider a trusteed cross purchase buy-sell or partnership plan.

How it works

1. Business owners enter into an agreement where trust/partnership will buy business in the event of death (or other triggering event).

2. Trust/partnership will buy multiple life insurance policies with business owners as insureds. Each business owner contributes cash to pay insurance premiums.

3. In the event of death, insurance proceeds are paid to Trust/partnership.

4. Trust/Partnership purchases the business interest from decedent’s estate and family receives cash. Trust/partnership distributes the business interests to the remaining owners.

 

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A trusteed buy-sell plan functions similarly to a traditional cross-purchase plan in that each business owner agrees to buy a selling owner’s interest upon a triggering event, but the trustee facilitates the ownership of the life insurance policies and the purchase of the owner’s interest. A trusteed buy-sell plan is best suited for businesses with multiple owners who want the benefits of a cross purchase plan with added simplicity.   

A trusteed buy-sell plan may not be the optimal choice for non-partnership entities (i.e., C or S corporations) due to potential transfer for value issues, so, a partnership arrangement may be considered as an alternative. The partnership purchases a policy on each owner’s life and the premiums are paid via contributions to the partnership by the business owners. Upon the death of an owner, the partnership can distribute the insurance proceeds to the surviving owners, allowing the surviving owners to purchase the business interests from the deceased owner’s estate – effectively accomplishing a cross-purchase buy-out. 

Clients will need to seek the advice of counsel to determine if this type of partnership should own additional assets beyond the life insurance policies to increase the legitimacy of the partnership. 

 

 

Salary Deferral

Based on your responses, you may want to consider a salary deferral plan.

How it Works

1. Employer allows employee to defer a portion of current compensation for future payment.

2. Employer purchases life insurance on employee’s life.

3. At retirement, employer can access the potential cash value to fund the retirement obligation promised to employee, e.g., amount deferred plus growth factor. 

4. At death, employer can use insurance proceeds to help recover costs.

 

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A salary deferral plan is ideal when an employer wants to provide an additional incentive to key employees to remain working for the business and the key employees are looking to defer taxation on current income. Key employees make a commitment to the long-term success of the business by deferring current income because their future benefit payments under the plan relies on the business’s success to afford the future benefit payments. The business also may choose to make additional contributions to the plan (similar to making a matching contribution to a 401(k) plan). To help with the administration, a third-party administrator is often used.

To ensure that funds will be available to pay the salary deferral benefits to the key employee, employers often purchase permanent life insurance due to the multiple tax advantages: tax deferred cash value growth; tax advantaged access to the policy cash value; and income tax free death benefit.

 

Supplemental Executive Retirement Plan (SERP)

Based on your responses, you may want to consider a supplemental executive retirement plan.

How it Works

1. Employer agrees to pay a retirement benefit to the employee.

2. Employer purchases life insurance on the employee’s life to informally fund the SERP arrangement.

3. At retirement, employer pays the employee the promised benefit – either in a lump sum or over a period of years.

4. At death, employer can use insurance proceeds to help recover costs.

 

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A SERP is an employer-paid, non-qualified deferred compensation plan that allows a business to provide key employees with retirement benefits in addition to those provided by qualified plans (e.g., 401(k)).

This type of arrangement is ideal for an employer who wants to provide incentive (i.e., “golden handcuff”) to key employees to remain working for the business for the long term. It offers maximum control to the employer because benefit payments are not paid until the employee fulfills his/her required employment obligation to earn the benefit. A SERP may also be appropriate when the business is looking to provide additional retirement benefits to the owners themselves (generally limited to C corporations). To help with the administration of this plan, a third-party administrator is often used. 

To ensure that funds will be available to pay the SERP benefit at a key employee’s retirement, employers often purchase permanent life insurance due to the multiple tax advantages: tax deferred cash value growth; tax advantaged access to the policy cash value; and income tax free death benefit.

 

Executive Bonus (“162 Bonus Plan”)

Based on your responses, you may want to consider an executive bonus plan.

How it Works

1. Employer agrees to pay employee a bonus sufficient to pay the premiums on a life insurance policy.

2. Employee purchases a permanent life insurance policy.

3. Employee can use the policy for living benefits including tax-advantaged supplemental retirement income, LTC benefits, etc.

4. At death, insurance proceeds are paid to employee’s family.

 

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Under an executive bonus plan, the bonus for the life insurance premium will be taxable to the employee as ordinary income and will be tax deductible to the employer in the year it is paid. If desired, the employer can choose to increase the annual bonus amount to cover the employee’s tax cost – known as a “double” bonus. This arrangement provides an additional incentive to the employee to remain working for the employer because the bonus to pay the premium will cease if the employee terminates employment.  

An executive bonus plan is simple to implement and requires no special administration. Additionally, a bonus plan allows the employee to customize the policy to receive living benefits such as: tax-advantaged supplemental retirement income, protection to help pay the costs associated with a serious illness or long-term care event through optional riders, and/or rewards and incentives for leading a healthy lifestyle with the John Hancock Vitality Program.

 

Restrictive Endorsement Bonus Arrangement (“REBA”)

Based on your responses, you may want to consider a restrictive endorsement bonus arrangement.

How it Works

1. Employer agrees to pay employee a bonus sufficient to pay for life insurance policy, but places certain restrictions on the policy.

2. Employee purchases a permanent life insurance policy and pays taxes as he/she “vests” in premium bonuses. If employee leaves, he/she must repay employer unvested premiums.

3. Once 100% vested, employee may receive living benefits from the policy including supplemental retirement income, LTC benefits, etc.

4. At death, insurance proceeds are paid to employee’s family.

 

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REBA is similar to an executive bonus plan, but includes an additional “golden handcuff” by way of a vesting schedule that requires the employee to repay the unvested amount if employment is terminated prior to full vesting.  The bonus for the life insurance premium will be taxable to the employee as ordinary income and will be tax deductible to the employer in the year it is vested. The employer can choose to increase (aka “double”) the annual bonus amount to cover the employee’s tax cost.

A REBA is simple to implement and requires no special administration other than tracking the vested/unvested amounts. It provides additional incentive to the employee to remain working for the employer until fully vested because the unvested portion will need to be repaid to the employer.

A REBA plan can be customized to offer a variety of living benefits including: tax-advantaged supplemental retirement income, protection to help pay the costs associated with a serious illness or long-term care event through optional riders, and/or rewards and incentives for leading a healthy lifestyle with John Hancock’s Vitality Program.

 

Personal Key Person

Based on your responses, you may want to consider a personal key person plan.

How it Works

1. Business owner purchases a permanent life insurance policy on his/her life.

2. Business owner overfunds the policy to build cash value over time.

3. Cash value can be used to supplement retirement income later in retirement.  The policy can provide additional living benefits such as long-term care or critical illness coverage when certain additional riders are added.

4. At death, insurance proceeds are paid to owner’s family and help replace the value of the business.

 

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A personal key person policy is an individually owned, permanent life insurance policy ideal for small business owners and their families to help protect against many uncertainties from both a personal and business perspective. This type of plan is well-suited for business owners who do not have a successor or have concerns about the ability to sell their business in the future.

A personal key person plan can help to ensure the owner’s heirs receive an amount equal to the full value of the business, may provide estate equalization, and a source of supplemental income. When certain riders are added, this type of plan can provide an additional benefit in case of a critical illness or long-term care event.

 

Tools and Resources

Personal Key Person Tool Kit

Life Insurance to Pay Estate Taxes

Based on your responses, you may want to consider using life insurance to pay for estate taxes.

 

How it Works

1. Business owner creates an ILIT to own a permanent policy on his/her life.

2. Business owner will gift cash to ILIT to cover premium.

3. ILIT is the owner/beneficiary of the life insurance policy and will pay the policy’s premiums.

4. At death, insurance proceeds are distributed to beneficiaries per trust specifications. Benefits are income tax free and not subject to estate taxes.

 

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For business owners who may have exposure to federal and/or state estate taxes upon their death, immediate liquidity may be essential as these taxes are typically due nine months after death. Without proper planning to address these liquidity needs, the estate of a business owner may need to sell business assets quickly, resulting in a potentially unfavorable fire sale of the business.

Life insurance is often the go-to funding source for these liquidity needs as the death benefit is received income-tax free and is immediately available to help cover expenses of administration and estate tax liabilities, without having to liquidate other assets in the estate. To keep the death benefit proceeds outside of the business owner’s taxable estate, life insurance will typically be owned in an Irrevocable Life Insurance Trust (ILIT).

 

Trusts should be drafted by an attorney familiar with such matters in order to take into account income and estate tax laws (including the generation-skipping tax). Failure to do so could result in adverse tax treatment of trust proceeds.

Key Person

Based on your responses, you may want to consider a key person plan.

How it Works

1. Employer purchases a life insurance policy on the life of a key employee.

2. The business pays the premium and will receive the death benefit. 

3. At the employee’s death, insurance proceeds will provide a tax-free benefit to recover the financial loss of the employee. The policy can also provide critical illness coverage during employee’s life if such rider is selected.

4. At a future date the employer may transfer the policy to the employee as a bonus.

 

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Each business, regardless of its size, has an individual or group of individuals who contribute to its success. The unexpected death, disability or illness sustained by of one of these “key” people can threaten the success of the company. A key person plan helps the business insure against financial impact if a key employee in no longer able to contribute.

While the main purpose of key person insurance is to provide a death benefit to the business in the event of an unexpected death of an essential employee, the business can share some of these benefits (either immediately or in the future) with the key employee.

 

Estate Equalization

Based on your responses, you may want to consider using life insurance for estate equalization.

How it Works

1. Business owner creates a will/trust to leave business to the child who will take over the business.

2. Business owner purchases a life insurance policy and names his/her other children as the beneficiary(ies).

3. At death, the child taking over the business receives the business.

4. The other children receive the tax-free death benefit.

 

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Passing on a family business to the next generation can present challenges, especially when there are some heirs more active in running the business than others. It’s not uncommon for conflicts between active and non-active business inheritors to occur over salaries paid to active members, dividends, asset purchases, etc. On the other hand, leaving a business entirely to certain heirs and excluding others is almost sure to create inequality and conflict unless the estate has sufficient liquidity to balance inheritances. To avoid creating conflict and inequality amongst the heirs at the death of the senior generation business owner, the purchase of a life insurance policy provides a resource to equalize the inheritance for the non-active heirs while protecting the business for the active heirs.

 

Non-Equity Collateral Assignment Split Dollar

Based on your responses, you may want to consider a non-equity collateral assignment split dollar plan.

How it Works

1. Business enters into a non-equity collateral assignment agreement with employee.

2. Employee purchases a life insurance policy and business agrees to pay the premiums while the split dollar agreement is in force.

3. Employee agrees to repay the business the greater of premiums paid or policy cash value and recognizes “economic benefit” costs into income each year.

4. At death, business is repaid and employee’s family receives the remaining death benefit. 

 

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A split dollar plan is a method of funding the premium on a life insurance policy between two parties. In a non-equity collateral assignment split dollar plan, the business pays the premium on a life insurance policy owned by the insured (usually an employee or an owner of the business) or a trust created by the insured. In return, the insured (or the insured’s trust) will be responsible for repaying the business the greater of premiums paid or cash value at a future point in time. The insured’s annual taxable amount is measured by the “economic benefit” cost of the death benefit that belongs to the insured. The economic benefit is the cost of one-year term insurance as determined by IRS Table 2001 or the carrier’s alternative term rates (if available).

This arrangement can be effective for employers who are looking to provide an additional incentive for a key employee, but who also would like the option of cost recovery upon the insured’s death. For the employee, this arrangement provides an affordable way to purchase permanent death benefit protection for their family. A non-equity collateral assignment plan is particularly well-suited for younger insureds or when a survivorship policy is used because the economic benefit costs are very low. 

 

Tools and Resources

Split Dollar Client Guide

Section 6166 Election

Based on your responses, you may want to consider using life insurance in combination with the 6166 Election.

How it Works

1. Business owner establishes an irrevocable life insurance trust (ILIT) to own a permanent policy on his/her life.

2. Business owner will gift cash to the ILIT to cover the annual life insurance premiums.

3.The ILIT is the owner/beneficiary and will pay the premiums on the life insurance

4. At owner’s death, the insurance proceeds can be used to pay estate taxes (immediately, or over time if a 6166 election has been made)

 

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Insufficient liquidity at death may force a business owner’s estate to sell the business to pay estate taxes. A 6166 election allows the estate of a deceased business owner to temporarily defer estate taxes due on “qualifying business interests” (up to 5 years) and pay the estate taxes over a period of time (up to 15 years).  However, a 6166 election is not available on all business interests (e.g. passive interests do not qualify) and does not allow deferral of estate taxes due on other assets in the estate.  Consequently, life insurance is often used in conjunction with, or as an alternative to, a 6166 election to help ensure liquidity to meet estate tax obligations.

 

Trusts should be drafted by an attorney familiar with such matters in order to take into account income and estate tax laws (including the generation-skipping tax). Failure to do so could result in adverse tax treatment of trust proceeds.

Tools and Resources

Because You Asked: Section 6166

Loan Regime Split Dollar

Based on your responses, you may want to consider a loan regime split dollar plan.

How it Works

1. Business enter into a loan regime split dollar agreement with employee.  

2. Employee purchases a life insurance policy and business agrees to pay the premiums while the split dollar agreement is in force.

3. Employee must repay the business cumulative premiums paid plus interest. 

4. At death, business is repaid amount owed and employee’s family will receive remaining death benefit.

 

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A split dollar plan is a method of funding the premium on a life insurance policy between two parties. In a loan regime split dollar plan, the business agrees to pay the premium on a life insurance policy owned by the employee in return for the commitment by the employee to repay the business the outstanding loan balance (cumulative premiums plus accrued interest, if any) at a designated future date. The cost to the employee each year is the interest due on the premium loans, which is determined by the Applicable Federal Rate (AFR) in effect when each premium loan is made. When the loan term is over, the business has the right to be repaid the cumulative loan balance or may choose to forgive the debt (all or in part) as an additional benefit to the employee. 

This arrangement is simple to administer and offers the employer the ability to recover its costs – either at the employee’s retirement or employee’s death. For the employee, this arrangement provides death benefit protection and access to supplemental retirement income once cash value exceeds the outstanding loan balance payable to the business.

 

Tools and Resources

Split Dollar Client Guide

Supplementing Income with Life Insurance in Retirement

Based on your responses, you may want to consider supplementing retirement income with life insurance.

How it Works

1. Business owner purchases a permanent policy on his/her life.

2. Business owner overfunds the policy to build cash value over time.

3. During retirement, cash value can provide tax advantaged supplemental income. The policy can provide living benefits such as long-term care or critical illness coverage when certain additional riders are added.

4. At death, insurance proceeds are paid to owner’s family.

 

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For many people, planning for retirement is one of the biggest financial priorities and one of the greatest financial challenges. Social Security and company-sponsored qualified plans may not provide sufficient income to meet retirement goals. A permanent life insurance policy can be used to bolster retirement income in a tax-advantaged manner while the death benefit protection offers peace-of-mind.

Using life insurance cash value for tax-advantaged income can be valuable for timing the impact of income taxes across all sources of a retiree’s income. Any remaining death benefit can be used to defray costs of living for a surviving spouse or to provide a legacy to other family members. 

 

Supplementing Income with Life Insurance in Retirement

Based on your responses, you may want to consider supplementing retirement income with life insurance.

How it Works

1. Business owner purchases a permanent policy on his/her life.

2. Business owner overfunds the policy to build cash value over time.

3. During retirement, cash value can provide tax advantaged supplemental income. The policy can provide living benefits such as long-term care or critical illness coverage when certain additional riders are added.

4. At death, insurance proceeds are paid to owner’s family.

 

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For many people, planning for retirement is one of the biggest financial priorities and one of the greatest financial challenges. Social Security and company-sponsored qualified plans may not provide sufficient income to meet retirement goals. A permanent life insurance policy can be used to bolster retirement income in a tax-advantaged manner while offering peace-of-mind because of the death benefit protection it offers.

Using life insurance cash value for tax-advantaged income can be valuable for timing the impact of income taxes across all sources of a retiree’s income. Any remaining death benefit can be used to defray costs of living for a surviving spouse or to provide a legacy to other family members. 

 

Retirement Income Backstop

Based on your responses, you may want to consider a retirement income backstop plan.

How it Works

1. Business owner purchases a permanent policy.

2. Business owner overfunds a policy to build cash value over time.

3. During retirement, the policy's potential cash value can provide tax advantaged supplemental income. The policy can provide living benefits such as long-term care or critical illness coverage when certain additional riders are added.

4. At death, insurance proceeds are paid to owner’s family.

 

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A permanent life insurance policy can be an effective solution to provide a “backstop” against unplanned retirement risks such as living longer than expected, inflation, and withdrawal rate risk. The backstop approach goes beyond providing supplemental income for retirement, and focuses on mitigating risks that can deplete an individual’s retirement sources sooner than anticipated.

While supplemental retirement income with life insurance is often focused on individuals age 30 to 50, the retirement income backstop concept focuses on individuals who are age 45 to 65 who want to build in layers of protection for today, using features such optional riders for long-term care or critical illness events while receiving income for tomorrow via policy cash values. The retirement income backstop strategy may be particularly appealing to business owners who are approaching retirement and looking for ways to bolster their retirement savings and provide additional protections against unforeseen risks. 

 

Cross-Purchase Buy-Sell

Based on your responses, you may want to consider a cross purchase buy-sell plan.

How it Works

1. Business owners enter into an agreement to buy out each other’s interest in the event of death (or other triggering event).

2. They purchase life insurance on each other’s life (e.g., A owns policy on B’s life and vice versa).

3. At the first owner’s death, death benefit will be paid out to the other owner (e.g. if A dies, B will receive death benefit).

4. Remaining owner buys the business interest from decedent owner’s estate, and decedent owner’s family receives cash.

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A cross purchase buy-sell plan is an arrangement in which each remaining business owner agrees to buy the selling owner’s interest upon a triggering event, such as disability, retirement, or death.

Life insurance is an excellent funding vehicle for this type of buy-sell arrangement because each owner receives the death benefit proceeds income tax free and any potential cash value inside of the policy grows tax-deferred. Because this type of buy-sell arrangement requires multiple policies to be purchased, it is generally recommended that a cross-purchase plan be used when there are three or fewer owners.

This material does not constitute tax, legal, investment or accounting advice and is not intended for use by a taxpayer for the purposes of avoiding any IRS penalty. Comments on taxation are based on tax law current as of the time we produced the material.

All information and materials provided by John Hancock are to support the marketing and sale of our products and services, and are not intended to be impartial advice or recommendations. John Hancock and its representatives will receive compensation from such sales or services. Anyone interested in these transactions or topics may want to seek advice based on his or her particular circumstances from independent advisors.

Life insurance death benefit proceeds are generally excludable from the beneficiary’s gross income for income tax purposes. There are few exceptions such as when a life insurance policy has been transferred for valuable consideration.

Loans and withdrawals will reduce the death benefit, cash surrender value, and may cause the policy to lapse. Lapse or surrender of a policy with a loan may cause the recognition of taxable income. Policies classified as modified endowment contracts may be subject to tax when a loan or withdrawal is made. A federal tax penalty of 10% may also apply if the loan or withdrawal is taken prior to age 59 1/2.

Some riders may have additional fees and expenses associated with them.

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