Income protection solutions for key employees For financial professional use only. Not for use in sales situations.

Disability insurance from Principal® is issued by Principal Life Insurance Company, a member of the Principal Financial Group, Des Moines, IA 50392, This is an overview of the benefits disability insurance provides, but there are limitations and exclusions. This information is provided with the understanding that Principal® is not providing tax, legal or accounting advice. Consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. No part of this presentation may be reproduced or used in any form or by any means, electronic or mechanical, including photocopying or recording, or by any information storage and retrieval system, without prior written permission from the Principal Financial Group®. © 2016 Principal, Principal and symbol design and Principal Financial Group are registered trademarks and service marks of Principal Financial Services, Inc., a member of the Principal Financial Group. For financial professional use only. Not for use in sales situations.

The Risks are Real For financial professional use only. Not for use in sales situations. Average Age Number of people in a group %82%92%97%99% 30 54%79%90%96%98%99% 35 50%75%88%94%97%98% 40 45%70%84%91%95%97% 45 40%64%78%87%92%95% 50 33%55%70%80%86%91% 55 25%43%57%68%70%82% 60 14%26%37%46%53%60% Source: Commissioner’s Individual Disability A table

Common types of disability claims For financial professional use only. Not for use in sales situations. Source: Principal Life Disability insurance claims payments issued in The above is for illustrative purposes only And is not intended as an inclusive representation of all claims.

Reward and retain key employees Recruit new employees Protect their income and their ability to save for retirement even if they couldn’t work due to an illness or injury For the employerFor the key employees Identifying the opportunities For financial professional use only. Not for use in sales situations. Key employees Can be anyone Anyone who is critical to the business Executives, owners, office manager with a good rapport with suppliers or someone with a specialized skill

For financial professional use only. Not for use in sales situations. Salary continuation program

7 Overview Also known as qualified sick-pay, wage continuation or Section 105 program Formal, qualified plan describes, in writing, how employer will continue paying all or part of owner/key employees’ salary if they become disabled Ideal for C-Corporations (owners can also be covered) Commonly funded by Individual Disability Income (DI) insurance Covers entire classes of employees – does not allow for selectivity within a class The IRS says: No Plan – No Deduction! For financial professional use only. Not for use in sales situations. Salary continuation

Guidelines The program, in writing, must state: Who is covered How much to pay When payments begin How long payments continue In order to gain tax advantages, the program must: Be established prior to a disability Be supported by a written agreement Be communicated to all covered employees Show intent to fulfill a promise of benefits For financial professional use only. Not for use in sales situations. Salary continuation

Benefits To the business: Helps attract and retain quality employees Reinforces positive employer-employee relationships Manages a known risk on a sound basis without an unacceptable drain on profits Uses the business checkbook on a tax-favored basis To key employees: Protects their income Helps cover the extra expenses often associated with disability Provides disability coverage at little or no cost to them For financial professional use only. Not for use in sales situations. Salary continuation

Current Situation Business owner or key employee is healthy and working. The business pays the disabled employee a salary. The employee pays taxes on the income they receive. The business receives a tax deduction for salary payments. For financial professional use only. Not for use in sales situations. Salary continuation

Problem A disability occurs with no Salary Continuation program in place. The business pays the disabled employee a dividend. The employee pays taxes on that dividend payment. RESULT: DOUBLE TAXATION Once for the business and again for the disabled employee. The business wants to continue paying a salary. IRS rules view payments as dividends and NOT salary. For financial professional use only. Not for use in sales situations. Salary continuation

How it Works Employee (Policy Owner) Employer (Premium Payer) Insurance Company 1(IRC Section 162(a)). 2(IRC Section 106). 3(IRC Section 105(a)). Deductible premiums (as a fringe benefit expense for the business) Premiums not taxed to employee Taxable disability benefits Covered employee is healthy. Covered employee is disabled. For financial professional use only. Not for use in sales situations. Salary continuation

For financial professional use only. Not for use in sales situations. Executive Bonus Program

Informal, nonqualified program allows employer to pay extra salary to executives, who use that money to purchase DI insurance Ideal for partners/members of LLCs and S-Corporation owners Helps attract and retain key employees. Allows flexibility to only cover select employees (some discrimination allowed) Overview For financial professional use only. Not for use in sales situations. Executive bonus

Benefits To the business Simplicity and selectivity No “formal” plan put in place (no paperwork) Premiums are deductible as normal compensation Supplements any Group LTD program Inexpensive and simple to understand, implement and administer Available to all business entities To key employees Disability income payments are received income tax-free Policy is portable For financial professional use only. Not for use in sales situations. Executive bonus

How it Works Insurance Company Employer Employee (Policy Owner) Taxable bonus Premium payments Income tax-free disability benefits For financial professional use only. Not for use in sales situations. Executive bonus

For financial professional use only. Not for use in sales situations. Comparison of Options

Taxation Premium Payer Premium to Employer DI Premium to Employee DI Benefit to Employee Salary Cont.EmployerDeductibleTax-freeTaxable Executive Bonus EmployerDeductibleTaxableTax-free For financial professional use only. Not for use in sales situations. Executive bonus

Answer: Salary Continuation program Employer wants to cover a broad range of employees Does not want employees to be taxed on premiums Isn’t concerned disability income benefits will be taxable Willing to develop and administer formal SC plan Answer: Executive Bonus program Employer wants to cover only select employees (possibly just the owners) Primary concern is selecting who receives disability coverage Believes strongly in tax-free benefits Less formal documentation For financial professional use only. Not for use in sales situations. Determining the best solution

For financial professional use only. Not for use in sales situations. Solutions

Multi-Life discounts may be available Discuss income continuation. Ask owners: Could you continue to pay a disabled employee’s salary from your business? How long could you afford to pay a salary to an owner or key employee who is too sick or hurt to work? Would the payments you pay be deductible to your business? Helps supplement group coverage Individual Disability Income For financial professional use only. Not for use in sales situations. Solutions

Combining with group coverage For financial professional use only. Not for use in sales situations. $29, % 80% 60% 40% 20% 0% Monthly Income before taxes Group LTD benefits of 60% up to a $10,000 monthly benefit cap, a $1,850 IDI benefit, and assuming a 30% tax bracket for Federal, State and FICA. For illustrative purposes only. Group LTD benefit + Individual DI policy Sample – Annual Gross Income: $350,000 24% income replacement 66% income replacement (post-tax) $7,000 Group LTD Benefit (after taxes) $20,417 Monthly Income after taxes $10,000 Group LTD Benefit (before taxes) $12,000 $7,000

Impact of a disability on retirement For financial professional use only. Not for use in sales situations. Assumptions: $2,000/month contributions beginning at age 30, 5% rate of return and age 65 retirement. Consequences of disability at age 40, without DI Retirement Security.

DI Retirement Security Carrier Client Irrevocable trust Benefits paid out during retirement Premium Benefits deposited and invested For financial professional use only. Not for use in sales situations.

Working together For financial professional use only. Not for use in sales situations.

Questions For financial professional use only. Not for use in sales situations. DI │06/2016 │ ©2016 Principal Financial Services