1. SOLUTIONS FOR YOUR KEY EMPLOYEES Income Protection with Individual Disability Insurance For Producer Information Only. Not For Use In Sales Situations.

2. The risk of disability is realy 1 in 4 of today’s 20-year olds will become disabled before retiring. 1 1 Social Security Administration Fact Sheet, April 2014 2 Employee Benefit Research Institute 2014 Retirement Confidence Survey underwritten by the Principal Financial Group ® The #1 reason for an unexpected early retirement is health problems. 2

3. The foundation of financial security

4. Two Programs 1.Salary Continuation Program 2.Executive Bonus

5. DI Salary Continuation Program

6. 6 Overview 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 The IRS says: No Plan – No Deduction! DI Salary Continuation Program

7. Individual DI Insurance premiums are tax deductible to the business as a fringe benefit Premiums are not taxed as income to the employee Benefits are taxable to the disabled employee (proportionate to employer contributions) Taxation DI Salary Continuation Program

8. Guidelines The program, in writing, must state: Who is covered How much to pay When payments begin How long payments continue DI Salary Continuation Program 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 in writing Show intent to fulfill a promise of benefits Section 105 of the Internal Revenue Code

9. Advantages To the business: Reinforces positive employer-employee relationships Manages a known risk on a sound basis Uses the business checkbook on a tax-favored basis DI Salary Continuation Program To key employees: Protects their income Provides disability coverage at little or no cost to them

10. 10 Current Situation Business owner or key employee is healthy and working. Business pays the disabled employee a salary. Employee pays taxes on the income he/she receives. DI Salary Continuation Program Business receives a tax deduction for salary payments.

11. Problem A disability occurs with no Salary Continuation program in place. Business pays the disabled employee a dividend. Employee pays taxes on that dividend payment. RESULT: DOUBLE TAXATION Once for the business and again for the disabled employee. DI Salary Continuation Program Business wants to continue paying a salary. IRS says payments are dividends, NOT salary.

12. Solution Employee Employer (pays premiums) Principal Life 1(IRC Section 162(a)). 2(IRC Section 106). 3(IRC Section 105(a)). DI Salary Continuation Program Premiums Tax-deductible to employer Benefits Taxable to employee A disability occurs and a Salary Continuation program is in place.

13. DI Executive Bonus Program

14. 14 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 Allows flexibility to only cover select employees (some discrimination allowed) Overview DI Executive Bonus Program

15. Taxation DI Executive Bonus Program Premium Payor Premiums: Employer Premiums: Employee DI Benefit to Employee Salary Cont. EmployerDeductibleTax-freeTaxable Executive Bonus EmployerDeductibleTaxableTax-free

16. Advantages To the business: Simplicity and selectivity No “formal” plan put in place (no paperwork) Premiums are deductible as normal compensation Available to all business entities DI Executive Bonus Program To key employees: Protects their income Individual DI benefits are received income tax-free Policy is owned by the employee and is portable

17. How it Works Principal Life Employer Employee (Policy Owner) DI Executive Bonus Program Taxable bonus Premium payments Income tax-free disability benefits

18. Comparison of Options

19. FeaturesExecutive BonusDI Salary Continuation Ideal Business Organizations - Partnerships/LLCs - S Corporations - C Corporations - Employees of LLCs and S Corporations (not owners) Covered Employees Employer can choose which employees may receive coverage. Employer can elect to cover classes of employees. Plan Establishment No paperwork or documentation needed. Formal plan must be created and communicated in accordance with IRC Section 105. Comparison of Options

20. FeaturesExecutive BonusDI Salary Continuation Premiums – Employers Deductible to employer as regular compensation. IRC Section 162(a) Deductible to employer as fringe benefit expense. IRC Section 162(a) Premiums – Employees Taxable as income to employee. IRC Section 61(a) Not taxable. IRC Section 106 BenefitsTax-free. IRC Section 104(a)(3) Taxable. IRC Section 105(a) Employer Taxes at Claim Time No tax or other liability.Pays FICA tax for first 6 months of disability. Comparison of Options

21. 21 What’s the Right Solution for You? Who do you want to cover? How do you feel about paying employees additional, taxable compensation? Are you concerned whether or not disability payments would be taxable to the employee? How much paperwork are you willing to incur? Comparison of Options

22. Additional Solutions

23. DI Retirement Security Protect retirement savings Individual DI policy that pays disability benefits to a trust to be accessed as retirement income May be offered to employees as an employer-sponsored benefit Employer chooses who pays the premium Tax-free benefits, if employee paid the benefits with after-tax dollars or from a bonus from the employer

24. DI Retirement Security How it works Principal Life Employee Irrevocable Trust Benefits paid out during retirement Premium Employee or employer pays Benefits deposited and invested

25. Key Person Replacement Insurance Protect your business Provides benefits to the business owner to help the business recover from the loss of a key employee due to a total disability. Benefits can be used at the owner’s discretion Benefits generally received income-tax free Not approved in all states; not available in California.

26. How it works Principal Life Employer Premium Benefits

27. Questions? 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®. Disability insurance has limitations and exclusions. DI Retirement Security is issued as a non-cancelable, guaranteed renewable, individual disability income insurance policy. It is not a pension or retirement program or a substitute for such a program. DI Retirement Security is not available for government employees, or anyone who is over insured based on Principal Life’s current Issue and Participation guidelines. It may not be available or the benefit amount may be reduced for certain occupations if there is existing DI coverage with lifetime benefits. Additional underwriting guidelines may apply. This publication is intended to provide accurate and authoritative information in regard to the subject matter covered. The accuracy of the information is not guaranteed and is provided with the understanding that The Principal is not rendering legal, accounting, or tax advice. While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. Insurance issued by Principal Life Insurance Company, a member of the Principal Financial Group, Des Moines, IA 50392. DI9208 | 01/2015 | © 2015 Principal Financial Services, Inc.