FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION Understanding Executive Bonus...

FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION

Understanding Executive BonusPresented by…

Policies issued by American General Life Insurance Company ("AGL“)

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Disclaimer

The information presented herein is not a comprehensive analysis of the topic presented, and the viewer should consult tax and legal advisors to understand all the ramifications of the topics discussed.

This information is general in nature and may be subject to change. The Company, its financial professionals and other representatives are not authorized to give legal, tax or accounting advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your situation, consult your professional attorney, tax advisor or accountant.

To ensure compliance with requirements imposed by U.S. Treasury Regulations, we inform you that any tax advice contained in this presentation (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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Employer Challenges

Attracting Top Employees

Retaining and Rewarding Top Employees

Tax Efficient Plan

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Employee Challenges

Family Income Protection

Retirement

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Executive Bonus PlansWhy “Employee” Owned

Tax-deferred accumulation

Tax-preferred distributions

Income tax-free death benefit

No income limits on participation

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Executive Bonus

Requirements for Plan to Qualify

Employer may NOT be beneficiary

Total salary and bonus must represent “reasonable

compensation”

Bonus to pay premium is ordinary and necessary

business expense

Employer must pay FICA and Medicare taxes on

bonused amounts

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Executive Bonus

Simplest

of the

Executive Benefit Plans

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Executive Bonus

EmployerEmployer EmployeeEmployee

Reportable IncomeBonus/Loan for Income Taxes

Premium Payment Policy OwnershipCash Value (unless restricted)Death Benefit

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Benefits to the Employer

Salary or bonus used to pay premiums represents an ordinary and necessary business expense of the employer, and, to the extent compensation is “reasonable” in the aggregate, is tax-deductible under Section 162.

The arrangement does not have to be prequalified by the IRS, nor is it subject to annual reporting and disclosure rules.

There are no annual administrative costs.

The employer may freely select the employee(s) it wishes to benefit and vary the benefit among the participating employees.

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Benefits to the Employee

Employee owns the policy, so it is portable if he or she terminates employment.

The death benefit is income-tax-free.

The employee’s income tax liability for additional compensation can be met by borrowing or withdrawing policy cash values (with a reduction in death benefit and possible tax consequences) or receiving an additional bonus from the employer.

The employee can use the cash value of the policy to, among other things, supplement retirement income (with a reduction in death benefit and possible tax consequences).

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Executive Bonus

efficient, cost effective

Meet family financial needs

Protect survivors

Ensure a legacy

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Executive Bonus

Ask a business owner about…

Rewarding key employees?

Ability to select whom they reward with no discrimination rules?

A plan where all contributions could be tax deductible?

Adding bells and whistles to their employee’s retirement plans?

Giving protection to employee’s family in exchange for his/her loyalty to the company?

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Executive Bonus - Opportunities Any closely held business with key employees;

Family businesses or sole proprietorships with

family members as employees;

Companies wishing to find a replacement for

qualified plan benefits;

Providing a premium source to fund a cross

purchase buy-sell between shareholders.

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Executive Bonus - Opportunities

Almost any type of life insurance policy

can be used.

However, selecting a product with excellent cash value growth potential combined with

preferred policy loans can prove superior for supplemental income and death benefit

coverage.

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Executive Bonus - Prospects

Age: Pre-Retirement

Income: Highly Compensated

Status in Company: Experience that cannot be

replaced.

Chief Executive Officer Chief Financial Officer

Chief Marketing Officer President

Executive Vice President Member of the Board of Directors

Senior Vice President Highly Compensated Sales People

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Executive Bonus Structures

& Variations

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Executive Bonus Basics

Single Bonus

Employer pays annual premium Employee cost — Tax on Bonus Example:

– Employer pays $10,000 Premium– Employee cost – tax on $10,000 ($10,000 x 0.30 = $3,000)

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Double Bonus

Employer covers annual premium plus tax on bonus Employee cost – zero out of pocket Example:

– Employer pays $10,000 premium + additional cash to pay tax– “Grossed up bonus” to Executive = $14,286– Bonus amount ÷ (1-tax rate)– $10,000 ÷ (1.00 - 0.30) = – $10,000 ÷ 0.70 = $14,286

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Bonus Plus Employer loans an amount sufficient to cover the income tax associated with the annual bonus Employee cost – zero out of pocket Example:

– Employer pays $10,000 premium + loans the employee $4,000/year (assuming a 40% tax bracket) to pay the income taxes that are due.– Appropriate IRS established interest must be charged for the loan until it is repaid in full. (If properly structured the cash value can be used to repay the principal and interest.)

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When Employer Wants More Control: Consider a “restricted” executive bonus arrangement Separate agreement between Employer and Executive Limits executive’s access to policy values Employer can better assure policy values use as planned This planning may help retain the executive with the employer

Control is the key word!

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Restrictive Executive Bonus Arrangement (REBA) Restricts executive’s use and enjoyment of the policy’s cash value Agreement between employer and executive Employer pays premium Restrictive endorsement is executed

– Limits executive’s rights to cash value– Restrictive endorsement released on occurrence of triggering event– retirement, disability, age, specific number of years, death, mutual agreement, etc

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Executive Bonus Arrangement

When does a Restricted Executive Bonus Fit?

Employer wants to control access to policy valuesOnly want to reward one or just a “few” key executives

Employers that wish to supplement qualified plansBusinesses that wish to provide supplemental benefits but don’t want high and/or continuing administration costs

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Executive Bonus

Issues to consider with any Executive Bonus

Arrangement:

Tax bracket of corporation and executive

Employer desires control of the plan

– Use restrictive agreement

Concerns about executive turnover

– Look to restrictive plan

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Theresa Kelly(Flower Shop Owner)

Theresa would like to reward Kathy for her efforts and

encourage her to continue working until her retirement.

She also wants this cost to be tax deductible to the company.

AG SecureLifetimeGUL II

The business purchases$1M policy

with GuaranteedDeath Benefit

for Kathy’s family

Solution Details

The business pays the insurance premium as an Executive Bonus,

which is tax-deductible

Kathy Johnson(Flower Shop Manager, age 50)

Premiums: $15,743 per year paid for 15 years with company cash bonuses

Protection Guarantees with Optionality® Executive Bonus Plan Keeps Key Employee

Additional bonuses are made to Kathy to cover any tax liabilities

Not an actual case. For illustrative purposes only. Quoted values based on female, issue age 50, Standard Plus Nontobacco underwriting class. Quote dated 05/28/2014 for the state of Texas.

AG Secure Lifetime GUL II®

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Executive Bonus Plans are a VALUABLE tool in helping:

1.Employers Recruit – Reward – Retain

2.EmployeesSave for Retirement

3.AgentsProvide valuable planning services and get

compensated

Executive Bonus Conclusion


Thank YOU!

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Important Information

The concepts presented herein are for informational purposes only and do Not constitute a recommendation that they are suitable for a particular individual or business. Neither American General Life Companies, nor its agents orrepresentatives, provide legal or tax advice. Any comments about legal or taxtreatment simply reflect the author’s understanding of current interpretations of thefederal tax laws as they relate to the planning technique. No coverage is given tostate tax laws, which must also be considered. Tax laws are also subject to changein the future. Clients and prospects should consult their own legal and tax advisorsto determine whether the recommended approach is appropriate for theircircumstances.

There are complex legal and tax implications associated with the strategy illustratedhere. The information presented herein is not a comprehensive analysis of the topicpresented. Clients must consult their own tax and/or legal advisors to determinewhether or not any plan or program illustrated is appropriate for them and tounderstand all the benefits and risks of any premium financed transaction.

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Important Information

Policies issued by: American General Life Insurance Company, 2727-A Allen Parkway, Houston, Texas 77019. Policy Form Numbers 10460, ICC-10460; Lifestyle Income Rider Form Number 13972; Accidental Death Benefit Rider Form Number 82012; Children’s Insurance Benefit Rider Form Number 82410; Spouse/Other Insured Term Rider Form Number 88390; Terminal Illness Rider Form Number 91401; Waiver of Monthly Deduction Rider Form Number 82001. The United States Life Insurance Company in the City of New York, One World Financial Center, 200 Liberty Street, New York, New York, 10281. Policy Form Number 10460N; Lifestyle Income Rider 13972N; Accidental Death Benefit Rider Form Number ADB791E; Children’s Insurance Benefit Rider Form Number CI791E1; Waiver of Monthly Deduction Rider Form Number 82001N. The underwriting risks, financial and contractual obligations and support functions associated with the products issued by American General Life Insurance Company (AGL) and The United States Life Insurance Company in the City of New York (US Life) are the issuing insurer’s responsibility. Guarantees are subject to the claims paying ability of the issuing insurance company. American General does not solicit business in the state of New York. Policies and riders not available in all states. American General Life Companies, www.americangeneral.com, is the marketing name for a group of affiliated domestic life insurers, including AGL and US Life. These product specifications are not intended to be all-inclusive of product information. State variations may apply. Please refer to the policy for complete details.

AGLC107389

© 2015. All rights reserved.

FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION Understanding Executive Bonus...

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