Life insurance benefits for small-business owners

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1 Allianz Life Insurance Company of North America Life insurance benefits for small-business owners Protecting the life of your business Small-business life insurance uses M-5101

2 Life insurance benefits for small-business owners Life insurance can help cover many employee benefit and small-business needs. If you own a small business, you should know that life insurance can do more for you than just provide a death benefit. Life insurance can also help in business succession planning and employee retention, while providing tax advantages for you and your business. Executives say maintaining their standard of living and preserving wealth are TWO OF THEIR BIGGEST FINANCIAL CONCERNS. 1 This brochure provides an overview of some ways in which fixed index universal life (FIUL) insurance can be part of your business-planning strategies. For more detailed information on how FIUL works, ask your financial professional. And keep in mind that most life insurance policies require health underwriting and, in some cases, financial underwriting. Benefits of fixed index universal life insurance (FIUL) Income tax benefits The death benefit is income-tax-free to your beneficiaries. Should they receive a death benefit down the road, they won t have to pay income taxes on the proceeds from the policy. The policy has the potential to accumulate cash value on a tax-deferred basis. That allows more cash value to remain in the policy, which can help it accumulate faster. The cash value may be accessed through income-taxfree loans and withdrawals 2 if the policy does not lapse or become a modified endowment contract (MEC). In addition, the cash value within your FIUL policy offers additional accumulation potential based on the performance of an external index. 1 The Value of Executive Benefits to Corporate Executives, LIMRA International, Inc., Policy loans are not usually subject to income tax unless the policy is classified as a modified endowment contract (MEC) under IRC Section 7702A. However, withdrawals or partial surrenders are subject to income tax to the extent that the cash value in the policy immediately before the distribution exceeds the owner s tax basis in the policy. If taken prior to age 59½, a 10% federal tax penalty may apply. Tax laws are subject to change and you should consult a tax professional.

3 TODAY, ONLY 61% OF MEN AND 57% OF WOMEN have some sort of life insurance coverage. 2 Executive compensation strategies Executive bonus plans Executive bonus plans which are sometimes called Section 162 plans allow you to pay a bonus to any employee(s) of your choosing. The bonus can then be used to fund life insurance coverage for the employee and the employee s family, and can serve as a tax deduction for your business when you write it off as employee compensation. 1 An executive bonus plan is a valuable benefit because it provides necessary life insurance coverage for your key employee(s) at little or no cost to them. The plan is straightforward to set up and administer, making it an easy and versatile way to attract, motivate, and retain key employees. Life insurance for cash value accumulation As an additional benefit, you could consider a life insurance policy (such as FIUL) that offers cash value accumulation potential, which can allow employees to cash value assets for future needs including supplementing their income in retirement through loans and withdrawals. 3 Restricted executive bonus plan (REBA) A restricted executive bonus plan (REBA) can be another attractive way to attract and retain key employees. This type of special benefit can help the key employees build loyalty to the business without the complexities of other types of plans. A REBA provides a key employee with a bonus that s used to fund a life insurance policy. This life insurance policy provides a death benefit to the employee s family if the employee dies while the policy is in force. When special restrictions are included that limit the employee s access to the policy s cash value until an agreed-upon time, the REBA can be a powerful incentive for an employee to remain with the company. Key person life insurance A key person can be any employee whose absence would have an adverse economic effect on your business. Key person life insurance covers one (or more) of these key employees, with the primary goal of protecting the value and ongoing operations of your business. In these policies, a portion of the premiums you pay is applied to your policy s cash value, which accumulates as you make additional premium payments. After the employees retire, they can supplement their retirement income by taking loans and withdrawals 3 from their policy s cash value. Loans and withdrawals 3 from the policy s cash value can also be used to help fund a college education or provide a source of funds in a financial emergency. Key person life insurance can be one of the most effective and easiest ways of ensuring business continuity. Because FIUL insurance provides accumulation potential, it can also help protect your business from the financial impact of a key person s disability. The potential cash value can be accessed through policy loans and withdrawals to help cover costs associated with the disability. 3 Key person life insurance can be cost-effective because you re paying only for the cost of the insurance and you may not have to pay taxes on any death benefit proceeds your business receives. 1 1 For more information on the tax implications of contributions to or distributions from this or any other employee benefit plan, consult your attorney or tax advisor. 2 Facts from LIMRA International, Life Insurance Awareness Month, September Policy loans are not usually subject to income tax unless the policy is classified as a modified endowment contract (MEC) under IRC Section 7702A. However, withdrawals or partial surrenders are subject to income tax to the extent that the cash value in the policy immediately before the distribution exceeds the owner s tax basis in the policy. If taken prior to age 59½, a 10% federal tax penalty may apply. Tax laws are subject to change and you should consult a tax professional.

4 Nonqualified deferred compensation plan Nonqualified deferred compensation plans allow your employees to set aside a portion of their income, with the expectation of receiving a payment or benefits from their employer at some point in the future. When a vesting schedule is applied, these plans can be an excellent employee retention tool. Employees are required to wait the specified time period in order to realize the payment and/or benefit offered by the plan. Nonqualified deferred compensation plans can further benefit your employees by potentially reducing their annual income tax liability for as long as they re participating in the plan. Employees don t pay taxes on any income they defer, until it is withdrawn from the plan. There are also income-tax benefits for your business. When your business uses life insurance to fund its obligations under a nonqualified deferred compensation plan, the business can deduct the plan s administration costs (but not the premium amount). Generally, nonqualified deferred compensation payments are deductible when your business pays them, just like regular wage or salary payments. 1 Buy-sell agreements funded with life insurance If you share ownership of your business, it s likely that at some point one of you will have to buy the other(s) out. Buy-sell agreements funded with life insurance offer several options for continuing your business in a variety of situations. They also create a binding agreement between the buyer and the seller, and lock in a purchase/sale price. Buy-sell agreements protect the value of your business by helping the remaining owners keep control of the business; transfer ownership in an orderly fashion; and provide stability for customers, employees, creditors, and investors. Partnership buy-sell agreements using life insurance Most traditional buy-sell agreements provide for the purchase of your business only upon your death. Those agreements generally don t have provisions for the more desirable possibility that you will eventually retire and leave the business. A partnership buy-sell agreement can provide a solution for the retirement or death of any owners. When properly established, it can provide cash to an owner upon retirement, or to survivors upon an owner s death; avoid conflicts between the remaining owners and the survivors of the deceased; and enable a smooth transition to a new owner upon in the event of a retirement or death. Please note that the life insurance used for the buy-sell agreements must be owned by a partnership, or LLC that s taxed as a partnership. If your business is an S or C corporation, you should consult with your own legal and tax advisors for guidance in setting up this separate business entity. LIFE INSURANCE CAN HELP PROTECT the value of your business against the loss of key employees. 1 For more information on the tax implications of contributions to or distributions from this or any other employee benefit plan, consult your attorney or tax advisor.

5 Life insurance can provide big benefits to small businesses. Call your financial professional today to find out more.

6 True to our promises so you can be true to yours. A leading provider of annuities and life insurance, Allianz Life Insurance Company of North America (Allianz) bases each decision on a philosophy of being true: True to our strength as an important part of a leading global financial organization. True to our passion for making wise investment decisions. And true to the people we serve, each and every day. Through a line of innovative products and a network of trusted financial professionals, and with over 2.2 million contracts issued, Allianz helps millions of people as they seek to achieve their financial and retirement goals. Founded in 1896, Allianz is proud to play a vital role in the success of our global parent, Allianz SE, one of the world s largest financial services companies. While we pride ourselves on our financial strength, we re made of much more than our balance sheet. We believe in making a difference with our clients by being true to our commitments and keeping our promises. People rely on Allianz today and count on us for tomorrow when they need us most. Guarantees are backed solely by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America. Product and feature availability may vary by state. Products are issued by: Allianz Life Insurance Company of North America PO Box Minneapolis, MN (R-11/2011)