For producer use only. Not for distribution to the public. 1

Life Insurance

in Defined Benefit PlansContinuing Education

July 2008

OLA 1902 0708

For producer use only. Not for distribution to the public. 2

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 be urged to consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here.

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 be urged to consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here.

For producer use only. Not for distribution to the public. 3

What Is a Qualified Retirement Plan?What Is a Qualified Retirement Plan?

Provides retirement benefits

Must meet specific IRC requirements

Qualifies for tax-favored treatment

- Deductible contributions

- Tax-deferred growth

Plan cannot discriminate

Provides retirement benefits

Must meet specific IRC requirements

Qualifies for tax-favored treatment

- Deductible contributions

- Tax-deferred growth

Plan cannot discriminate

For producer use only. Not for distribution to the public. 4

Qualified Plan ComparisonQualified Plan Comparison

Defined Benefit Defined Contribution

Retirement benefit defined in advance

Retirement benefit based on contributions and performance of plan investments

Employer bears investment risk

Participant bears investment risk

Life insurance as a plan asset may increase contributions

Life insurance as a plan asset does not increase contributions

For producer use only. Not for distribution to the public. 5

Why Are Defined Benefit Plans Popular Again?Why Are Defined Benefit Plans Popular Again?

Favorable pension reform: EGTRRA 2001

- Compensation/contribution limit increases

- No family aggregation

Pension Protection Act of 2006

- Deductibility limits for contributions to both defined contribution and defined benefit plans (covered by the PBGC) sponsored by the same employer repealed effective 1/1/2008

- Transitional relief provided

Favorable pension reform: EGTRRA 2001

- Compensation/contribution limit increases

- No family aggregation

Pension Protection Act of 2006

- Deductibility limits for contributions to both defined contribution and defined benefit plans (covered by the PBGC) sponsored by the same employer repealed effective 1/1/2008

- Transitional relief provided

For producer use only. Not for distribution to the public. 6

EGTRRA Increases Compensation and Benefit Limitations Defined Benefit Plan EGTRRA Increases Compensation and Benefit Limitations Defined Benefit Plan

  2001 2005 2006 2007 2008

IRC Section 401(a)(17) Compensation

$170,000 $210,000 $220,000 $225,000 $230,000

IRC Section 415 Annual Benefit

100% of pay not to exceed $140,000. Reduced if benefit starts before Social Security retirement age.

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.

For producer use only. Not for distribution to the public. 7

Traditional DB Plans vs. 412(e)(3) PlansTraditional DB Plans vs. 412(e)(3) Plans

Both are defined benefit plans

Similar client profiles

Large tax-deductible contributions

Differences:

- Investment flexibility vs. product guarantees

- Minimum funding standard• “Actuarial Certification”

Both are defined benefit plans

Similar client profiles

Large tax-deductible contributions

Differences:

- Investment flexibility vs. product guarantees

- Minimum funding standard• “Actuarial Certification”

For producer use only. Not for distribution to the public. 8

What Is a “Split-Funded” Defined Benefit Plan?What Is a “Split-Funded” Defined Benefit Plan?

A traditional defined benefit planthat includes both:

- Investment options

- Life insurance

A traditional defined benefit planthat includes both:

- Investment options

- Life insurance

For producer use only. Not for distribution to the public. 9

What About the Plan Benefit Options?What About the Plan Benefit Options?

Taken as retirement distributions

IRA rollover

Rollover to another qualified plan

Taken as retirement distributions

IRA rollover

Rollover to another qualified plan

For producer use only. Not for distribution to the public. 10

Types of InvestmentsTypes of Investments

Stocks

Bonds

Mutual funds

Annuities (fixed or variable)

Stocks

Bonds

Mutual funds

Annuities (fixed or variable)

For producer use only. Not for distribution to the public. 11

Types of Life Insurance UsedTypes of Life Insurance Used

Whole Life

Term

Universal life

Variable universal life– No definite ruling on VUL use in DB plan

Whole Life

Term

Universal life

Variable universal life– No definite ruling on VUL use in DB plan

For producer use only. Not for distribution to the public. 12

How Much Life Insurance Can Be Used?How Much Life Insurance Can Be Used?

Incidental benefit limitations– 100 times test

– 50% of annual contribution for whole life

– 25% of annual contribution for universal life or term

Defined contribution plans– “Seasoned money”

– Potentially, all employer funds that have been in the plan over two years can be used to purchase life insurance

Incidental benefit limitations– 100 times test

– 50% of annual contribution for whole life

– 25% of annual contribution for universal life or term

Defined contribution plans– “Seasoned money”

– Potentially, all employer funds that have been in the plan over two years can be used to purchase life insurance

For producer use only. Not for distribution to the public. 13

Why Buy Life Insurance Inside Qualified Plan?Why Buy Life Insurance Inside Qualified Plan?

Self-completion

Pre-tax dollars

Portability

Self-completion

Pre-tax dollars

Portability

For producer use only. Not for distribution to the public. 14

What if Life Insurance Is Still Neededat Retirement?What if Life Insurance Is Still Neededat Retirement?

Receive policy as plan distribution

Purchase policy from the plan

Roll policy to profit-sharing plan– New plan must allow for the purchase of life

insurance

Receive policy as plan distribution

Purchase policy from the plan

Roll policy to profit-sharing plan– New plan must allow for the purchase of life

insurance

For producer use only. Not for distribution to the public. 15

Tax ImplicationsTax Implications

Employer contribution is tax-deductible

Death benefit in excess of cash value is received federal income tax–free

Participant recognizes economic benefit

Generally, policy proceeds are includable in the gross estate

Employer contribution is tax-deductible

Death benefit in excess of cash value is received federal income tax–free

Participant recognizes economic benefit

Generally, policy proceeds are includable in the gross estate

For producer use only. Not for distribution to the public. 16

Valuing the Life Insurance PolicyValuing the Life Insurance Policy

Rev. Proc. 2005-25

Guidance on fair market value

Two safe harbor formulas

Rev. Proc. 2005-25

Guidance on fair market value

Two safe harbor formulas

For producer use only. Not for distribution to the public. 17

Who Might Benefit from a Split-funded DB Plan?Who Might Benefit from a Split-funded DB Plan?

Ideal candidates include:

Highly paid business owners

Companies with few or no employees

Companies with many employees and multiple owners/partners

Companies with existing 401(k)/profit-sharing plans

Ideal candidates include:

Highly paid business owners

Companies with few or no employees

Companies with many employees and multiple owners/partners

Companies with existing 401(k)/profit-sharing plans

For producer use only. Not for distribution to the public. 18

Role of the Third-Party AdministratorRole of the Third-Party Administrator

Develops suitable defined benefit plan proposal

Assists in preparation of plan documents

Performs annual administration – Calculates plan contributions (including Actuarial Certification)

– Prepares required reports

– Handles distributions

– Performs incidental benefits testing

Develops suitable defined benefit plan proposal

Assists in preparation of plan documents

Performs annual administration – Calculates plan contributions (including Actuarial Certification)

– Prepares required reports

– Handles distributions

– Performs incidental benefits testing

For producer use only. Not for distribution to the public. 19

Hypothetical Example #1: Surgical PracticeHypothetical Example #1: Surgical Practice

Doctor – $700k salary Wife – $100k salary 10 employees - $627k total salary Existing Profit-Sharing Plan:

– Doctor – $45k contribution

– Wife – $25k contribution

– 10 Employees - $151k contribution PROBLEM: The employee cost is twice that of the owner

For producer use only. Not for distribution to the public. 20

Example #1 (continued)Example #1 (continued)

Calculations provided by Pension Quote

Solution:– Layer “split-funded” defined benefit plan on top of

profit-sharing plan

New contributions:– Doctor: $256k

– Wife: $92k

– 10 Employees: $151k – NO CHANGE

$125k of contribution used to purchase Life Insurance

For producer use only. Not for distribution to the public. 21

Example #1 (continued)Example #1 (continued)

Calculations provided by Pension Quote

How?

Comparability Testing– Performed by TPA actuaries

– 25% of salary for 10 employees was already being contributed

Percentage of salary required for contributions on behalf of rank and file employees can be different within limits

For producer use only. Not for distribution to the public. 22

Example #2: Legal EagleExample #2: Legal Eagle

Multi-partner law firm:– 24 partners– 30 associates– 108 staff– Total contribution to existing profit-sharing/401(k) plan:

$1,712,000– Total contributions for associates/staff: $632,000

(8% of company’s associates/staff payroll)– Total contributions for partners: $1,080,000

63% of total contribution benefits the partners

Multi-partner law firm:– 24 partners– 30 associates– 108 staff– Total contribution to existing profit-sharing/401(k) plan:

$1,712,000– Total contributions for associates/staff: $632,000

(8% of company’s associates/staff payroll)– Total contributions for partners: $1,080,000

63% of total contribution benefits the partnersCalculations provided by Pension Quote

For producer use only. Not for distribution to the public. 23

Example # 2 (continued)Example # 2 (continued)

Solution:– Layer “split-funded” DB plan on existing plan

New contributions:– Partners: $3,552,000… $2,472,000 increase

– Employee contribution $632,000… no increase

Solution:– Layer “split-funded” DB plan on existing plan

New contributions:– Partners: $3,552,000… $2,472,000 increase

– Employee contribution $632,000… no increase

For producer use only. Not for distribution to the public. 24

Split-Funded DB Plans—SummarySplit-Funded DB Plans—Summary

Retirement income

Life insurance protection

Large tax-deductible contributions

Customizable

Retirement income

Life insurance protection

Large tax-deductible contributions

Customizable

For producer use only. Not for distribution to the public. 25

Transamerica Insurance & Investment Group (“Transamerica”) and its representatives do not give tax or legal advice. This presentation is for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must be urged to consult with and rely solely on their own independent advisors regarding the information and interpretations contained herein.

The information presented here does not take into consideration the applicable state laws of clients and prospects. Although care has been taken in preparing this material and presenting it accurately, Transamerica disclaims any implied or actual warranties as to the accuracy of any material contained herein and any liability with respect to it. The information in this presentation is current as of July 2008.

Transamerica Insurance & Investment Group is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Nashville, TN 37219-2417. Telephone: 615.880.4200. Web site: www.nasba.org.

In the state of New York, Transamerica Occidental Life Insurance Company is an approved provider of continuing education courses (Provider Organization Approval Number NYPO-100366).

Life Insurance in Defined Benefit Plans

Continuing EducationJuly 2008

OLA 1902 0708

For producer use only. Not for distribution to the public.