1. Conversationally Competent – Executive Benefits
Rick Katz
Director, Business Markets Development
AIG Advanced Markets
AIG
The most common obstacles to an agent’s success is rarely the technical aspects of the client development process. There are plenty of resources available to explain the legal, tax and other technical elements of a financial solution. Often, an agent’s obstacle is about either not having enough qualified prospects or not knowing what to say to them once they agree to meet. While much of the Business Development Institute focuses on the prospecting and client development, it is at least essential that an agent have a working knowledge or a conversational competence to present general business concepts to business owners. This module, module 3.3, will focus on being conversationally competent regarding Executive Benefits. Again, this is about having a general knowledge of what Executive Benefits are, why they would be used and how they are structured. It will help you develop questions that will be meaningful when collaborating with your clients and other professionals like CPAs and Attorneys. Hello; I am Rick Katz, the director of the AIG Business Development Institute. Let’s get started with Conversationally competent for Executive Benefits.
Module 3.4
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2. Disclosure
Advanced Markets is a marketing unit of American General Life Insurance Company (AGL), a member of American International Group, Inc. (AIG). No representation or warranty, express or implied, is made by AGL or its affiliates as to the completeness of the information provided. All companies mentioned, their employees, financial professionals and other representatives are not authorized to give legal, tax or accounting advice. Applicable laws and regulations are subject to change and individuals should consult an attorney, tax advisor or accountant. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. Policies issued by American General Life Insurance Company (AGL) except in New York, where issued by The United States Life Insurance Company un the City of New York (US Life). Issuing companies AGL and US Life are responsible for financial obligations of insurance products and are a member of American International Group, Inc. (AIG). Guarantees are backed by the claims-paying ability of the issuing insurance company. Products may not be available in all states and product features may vary by state.
AGLC © AIG All rights reserved.
As a reminder, AIG does not provide any legal or tax advice. A client should seek their own advice from a tax and/or legal professional.
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3. Opening
To win in the marketplace you must first win in the workplace Doug Conant
You don’t build a business – you build people – and people build the business Zig Ziglar
Retention programs are easier and cheaper than Replacement programs
Doug Conant, the renowned corporate leader, has been the President of Nabisco, CEO of Campbell’s Soup and Chairman of Avon. He knows a thing or two about leadership. He said, “To win in the marketplace you must first win in the workplace.” I’ve heard this another way too, Your customer cannot be any more satisfied and loyal than your employees are. I’m sure you’ve heard the saying, “It’s all about the people.” Zig Ziglar said, “You don’t build a business – you build people – and people build the business.” Businesses are interested in attracting and retaining the best talent that will execute the plan and achieve great things. It is also often true that it is less costly to retain great talent than it is to attract great talent. That is why employers would be interested in programs that may successfully retain great talent. We call these programs Executive Benefits.
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4. Why Executive Benefits?
Reward Key Employees
Without giving up ownership
Retain Key Employees
Long term benefits create long term gratitude
Attract Key Employees
It takes more than salary to get the best
There are three major goals of an executive benefits plan for an employer. First, rewarding key employees without necessarily giving up ownership of their company. Second retaining key employees. After all, long-term benefits create long-term gratitude. Thirdly, you want to attract key employees. It takes more than salary to get the best. More on that in just a minute. Rewarding, Retaining and Attracting key employees – that’s what it’s all about.
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5. 3 Basic Designs – To Reward, Retain or Attract
Executive Bonus – The Key Employee owns a policy on his/her own life and the premium is paid by the Employer either directly or as a bonus
Split Dollar – The Employer and Key Employee split the cost & benefits of a personally owned life insurance policy
Deferred Compensation– A promise of future income to the Key Employee in exchange for a salary reduction or future income for no salary reduction, all for loyalty
All of these plans attract. Let the experts help set them up.
While there are a countless number of plans available to attract retain and reward a key employees, we will explore the three most common plans, which are an executive bonus plan, a split dollar plan and a deferred compensation plan. First, an executive bonus plan. The key employee owns a policy on his or her own life in the premium is paid by the employer either directly or as a bonus. Next is a split dollar plan. The employer and key employee split the cost and benefits but they personally owned a Life Insurance policy. Finally, we will look at a deferred compensation plan. A deferred compensation plan is a promise of future income to the key employee in exchange for a salary reduction or future income for no salary reduction all for loyalty. Now, all of these plans are designed to attract, retain and reward. Be sure to let the experts help set them up. Depending upon the goals and resources of the employer, the plan selected may be different from one situation to the next. Let’s explore each plan in a bit more detail, so we may how to determine which plan may work best in each situation. This is a great time for reminder that tax and legal advice can only be given by a tax or legal professional.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

6. Executive Bonus - Split Dollar - Deferred Comp
The Key Employee applies for a life insurance policy on self
Key Employee owns policy
The payments by Employer are deductible
Additional compensation to employee
The Key Employee can access cash value
The Employer can restrict access
At death the Key Employee’s beneficiary receives the proceeds
Death benefit is free from federal income tax
First, let’s explore an executive bonus plan. Here is how it works. The key employee applies for a Life Insurance policy or himself or herself. The payments for the plan are made by the employer and are deductible because they are additional compensation to the employee. The key employee can access cash value and the employer can restrict access to this cash value. Now, at the death of a key employee, the key employees beneficiary can receive the proceeds. The death benefit is free from Federal income tax too. The executive bonus plan is probably the easiest plan to set up and administer. That feature makes it a very popular plan for employers and executives. There is very little paperwork and no reporting. When working with small business owners, simplicity is quite often a major goal of theirs. Even if you have the best solution if it is too complicated or cumbersome to set up and administer, the business owner will not be inclined to pursue the program.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

7. Executive Bonus - Split Dollar - Deferred Comp
REWARD
Sometimes in lieu of
company ownership
Here is a diagram explaining how an executive bonus plan works. As you can see, the employer pays the premiums into an employee’s Life Insurance policy. Loans and withdrawals can be made too by the employee. The death benefit proceeds go to the employees designated beneficiary. This can be an excellent reward to a loyal employee in lieu of providing them with company ownership, which could have many unintended consequences. Diagrams like this one are available on AIG’s advanced sales website. You can also receive explanations of plans in 50 words or less from this web site, which may be well received by your small business clients. The web address will be provided at the end of this module.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

8. Executive Bonus - Split Dollar - Deferred Comp
The Employer offers a fringe benefit – Life Insurance
Employer agrees to split costs and benefits
2 Common types in small business market
Endorsement - Employer owns the policy and endorses some of the death benefit to employee
The economic benefit is includable in Key Employee’s income
Collateral Assignment –Employee owns the policy and the employer loans the premium to the employee
Employee must pay interest or be taxed on imputed interest
That was executive bonus plans. Now, we will discuss split dollar plans. In a split dollar plan, the employer offers a fringe benefit, which is Life Insurance. The employer agrees to split the cost and benefits of the Life Insurance policy. There are two common types of split dollar plans used in the small business market. The first plan is called an endorsement plan. In an endorsement plan, the employer owns the policy in endorses some of the death benefit to the employee. The economic benefit is includible in the key employees income. The second common type used in the small business market, is a collateral assignment plan. With this setup, the employee owns the policy and the employer loans the premium to the employee to pay for the policy. The employee must pay interest or be taxed on imputed interest. As you have probably recognized, the split dollar plan is a bit more complex than the executive bonus plan. But, it has more flexibility to customize the plan to suit the needs of the employer in the desires of the employee. As you can see, the name split dollar comes from splitting the dollars between the employer and employee.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

9. Executive Bonus - Split Dollar - Deferred Comp
REWARD & RETAIN
Helps Key Employee
buy life insurance
at affordable cost
Here is a diagram describing Split Dollar. First the endorsement plan. As you can see the endorsement plan is owned by the employer and they endorse some of the benefit to the employee. For the collateral assignment plan the employee owns the policy and the employer are loans the premium to the employee. The split dollar plan is an excellent way to reward and retain key employees. It helps the key employee to buy a Life Insurance policy and a very affordable cost, since the employer is sharing the cost of the plan.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

10. Executive Bonus - Split Dollar - Deferred Comp
Employer agrees to pay Key Employee future compensation
If informally funded, no current tax
Employer purchased life insurance policy on Key Employee
Unofficial funding ensures deferral on taxes
At retirement* Employer pays Key Employee income
Employer uses policy’s cash value
At death of Key Employee, Employer pays a death benefit to beneficiary
Employer must meet notice & consent to avoid tax on death benefit
We have discussed executive bonus plans and split dollar plans. Now let’s talk about deferred compensation. In a deferred compensation plan, the employer agrees to pay a key employee future compensation. We may characterize this future compensation as supplemental retirement income for the employee. If the plan is informally funded, there’s no current tax liability to the key employee. The employer purchases a Life Insurance policy on the key employees life. It is considered unofficial or Informal funding to ensure the deferral of taxes. When it is time for the employee to retire, The employer pays the key employee income. The employer uses the policy’s cash value to pay this income. Since, at retirement, the employer is paying this income to the employee in the form of compensation, it is deductible to the employer. At the death of the key employee, the employer can pay any death benefit to the employees beneficiary. It is important to note that the employer must meet notice and consent rules to avoid tax on the death benefit. I am referring to IRC section 101(j). More on this in the next module.
* Or when agreed upon in advance
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11. Executive Bonus - Split Dollar - Deferred Comp
RETAIN
Provides benefits
beyond qualified plans
As you might have expected, here is a diagram of how a deferred compensation plan works. In the future, usually at the retirement of the employee, the employee receives benefits and pays taxes at that time. In the present, the employer promises to pay the employee future benefits if they stay with the company. The deferred compensation plan is an excellent way to retain high income key employees by providing them with benefits beyond qualified retirement plans. After all, even if the key executive contributes the maximum allowable to qualified retirement plans, they will still have to supplement their retirement income to replace as much as they received when they were working. This makes any help from the employer very important to the key employee.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

12. 3 Basic Designs – To Reward, Retain or Attract
Executive Bonus – The Key Employee owns a policy on his/her own life and the premium is paid by the Employer either directly or as a bonus
Simple to implement and easy to administer - REWARD
Split Dollar – The Employer and Key Employee split the cost & benefits of a personally owned life insurance policy
Employer can cement solid working relationship – RETAIN & REWARD
Deferred Compensation– A promise of future income to the Key Employee in exchange for a salary reduction or future income for no salary reduction, in exchange for loyalty
Employer can retain valuable, highly compensated Key Employees - RETAIN
We have discussed the three basic designs of executive benefit plans for key executives. These plans are designed to reward, retain or attract the best talent possible for your client’s company. The first plan we discussed was an executive bonus plan. With this plan, the key employee owns a policy on his or her own life in the premium is paid by the employer, either directly or as a bonus. The advantage of this plan is that it is simple to implement and easy to administer. It is an excellent way to reward a key employee. The second plan we considered was a split dollar plan. With a split dollar plan, the employer and key employee split the cost and benefits of a personally owned Life Insurance policy. With a split dollar plan, the employer can cement a solid working relationship with the key employee. It is an excellent way to retain an reward key employees. Finally, we discussed a deferred compensation plan. This plan is sometimes referred to as a deferred comp plan. It is a promise of future income to the key employee in exchange for a salary reduction, or future income for no salary reduction, in exchange for the loyalty of the key employee. This allows an employer to retain valuable highly compensated key employees by providing them with additional retirement income and possibly survivor benefits as well.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION.

13. Call to Action: Visit the AIG Advanced Markets website
Become familiar with Concept Pages
AIG.com/AdvancedMarkets
Identify professionals to collaborate on plan design
Use AIG Advanced Markets team
Next module: 3.4 Conversationally Competent – 7 IRC sections advisers should know
Quite often, the best way to learn new concepts is to use them in practice. So, here is your call to action. First, visit the AIG advanced markets website and become familiar with concept pages. You can find the website at Next, I recommend that you identify professionals to collaborate with on plan designs. Of course, I am referring to CPAs and attorneys. An example of this activity may be to call local CPAs and interview them to see if they might be good strategic partners to work with you and your clients. Eventually, you may also be able to work with their clients. Also, don’t forget to use the AIG advanced sales team. We’re here to help you with case design, training and other assistance. You can reach us at Or, you can us at advanced markets at AIG.com. In our next module, module 3.5, we will continue our discussion about becoming conversationally competent. In this module, we will discuss the seven IRC sections every adviser should be familiar with.
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14. Questions or Comments? AIG Advanced Markets Business Development Institute BDI@AIG.com 855-323-6923
If you have any comments, questions or feedback about this module or anything else regarding the AIG business development institute, please contact us by at BDI at AIG.com. Or, you can call our AIG advanced sales team at This is Rick Katz for AIG’s business development institute. Remember, the more small business Owners you help, the more successful you will be.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR PUBLIC DISTRIBUTION.