Life Insurance

What is Life Insurance

What is a Life Policy


What is an Annuity

Single Premium Deferred Annuity (SPDA)

Flexible Premium Deferred Annuity (FPDA)

Single Premium Immediate Annuity (SPIA)

Split/Combo SPDA & SPIA

Indexed Annuity

Variable Annuity

Long Term Care annuities

Laddering with Annuities

Advanced Sales Solutions

Business Continuation Planning

Key Person

Salary Continuation

Executive Bonus

Employee Stock Option Plan

Irrevocable Life Trusts

Non-Qualified Deferred Compensation

Estate Planning

Buy Sells


What is Life Insurance?

Life insurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured individual's death or other event, such as terminalor critical illness. In return, the policy owner agrees to pay a stipulated amount called a premium at regular intervals or in lump sums.

What is a Life Policy?

Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; for example claims relating to suicide, fraud, war, riot and civil commotion.

Life-based contracts tend to fall into two major categories:

Protection policies- designed to provide a benefit in the event of specified event, typically a lump sum payment. A common form of this design is term insurance.

Investment policies- where the main objective is to facilitate the growth of capital by regular or single premiums. Common forms are whole life,universal life and return of premium term life policies.


What is an Annuity

An annuity is a contract between you (the purchaser or owner) and an insurance company. In its simplest form, you pay money to an annuity issuer, and the issuer then pays the principal and earnings back to you or to a named beneficiary.

Two basic annuity concepts:

  • Immediate annuity – income stream begins immediately upon payment of the first premium
  • Deferred annuity – income stream begins later (or not at all, at the owner’s discretion)

Single Premium Deferred Annuity (SPDA)

A deferred annuity purchase having one lump-sum premium payment. Single-premium deferred annuities offer the tax benefit of increasing in value tax-free until distribution takes place. Thus, an investor could pay a large single premium, have the investment build up free of taxes for a period of years, and then receive partially taxable annuity payments at retirement. A single-premium deferred annuity is more flexible than an individual retirement account, but unlike contributions by some individuals to an IRA, a premium to purchase a deferred annuity is not deductible for tax purposes.

Flexible Premium Deferred Annuity (FPDA)

A type of deferred annuity allowing flexible premium payments after the initial premium has been paid. An annuity that accepts periodic contributions, which can usually be made at any time (as opposed to single premium). A deferred annuity contract that allows the owner to make continual payments. The amounts and times of these payments are often left completely up to the owner. Interest is paid from the date they are received and the amount available to annuitize is dependent on when and how much is received. It can be purchased with a series of regular payments over a period of time. The investor is usually allowed to change the amount or frequency of payments, subject to minimum annual amounts.

Single Premium Immediate Annuity (SPIA)

An immediate annuity makes income payments immediately, or very soon after purchase.

Split/Combo SPDA & SPIA

A split annuity is not an annuity policy but a combination of two annuity products. A single premium deferred annuity (SPDA) and a single premium immediate annuity (SPIA). Structured in such a way as to produce immediate tax advantaged income for a guaranteed period of time and to restore the original principal at the end of the same time period.
The SPDA is used to restore the original principal at the end of the guaranteed period, while the SPIA provides guaranteed monthly tax advantaged income for the same time period.

Advantages of using a split annuity are:

  • Dependable Tax-Advantaged Income generating a stream of guaranteed monthly income for a set period of time.
  • Tax-Advantaged Income due to the fact that a major portion of the premium is considered return of premium of the original investment. As much as 97% can be tax-free depending on the age of the client and the amount which is deemed to be a return of premium.
  • Tax-Deferred Growth and Principal Preservation of the portion of the split-annuity which is invested in an SPDA. The goal is to restore the principal to it’s original amount at the end of the guaranteed period, allowing the client to start the process over again.

Indexed Annuity

An indexed annuity is a deferred annuity whose return is tied to the performance of a particular equity market index. Your investment principal is usually protected against severe market downturns, you may have an annual return of 0% but not less than 0%. However, earnings are generally capped at a fixed percentage, so any index gains that are above the cap are not reflected in your annual return. Indexed annuity contracts generally require you to commit your assets for a particular term, such as 5, 10, or 15 years. Some but not all contracts limit your participation rate, which means that only a percentage of your premium has a potential to earn a rate higher than a guaranteed rate.

Variable Annuity

Assets are invested in separate accounts which are subject to market fluctuations allowing the value to be worth more or less than the original premium investment.

Long Term Care annuities

Long Term Care (LTC) annuities are single premium deferred annuities with a long term care benefit attached. They are safe, the funds accrue at a competitive interest rate, and the account grows tax deferred.

To form a LTC annuity, the insurance company has built in a “long term care option”. It is not a rider and there is no additional premium for this option. The insurance company provides up to three times the single premium as an additional LTC benefit.

Usually LTC annuities credit interest at a lower rate than single premium deferred annuities. If the client does not need long term care, the annuity continues to grow tax-deferred. However, if sometime in the future a long term care need does arise, they will be able to draw from their annuity as a long term care benefit. Note: when the client draws on their LTC annuity for long term care benefits it proportionally draws down their annuity value. The annuity value could be zero, but the LTC “three times benefit” will still be providing LTC benefits, until it is exhausted.

The Pension Protection Act of 2006 stated that benefits for long term care used from LTC annuities will not create a taxable event (effective January 1, 2010).

To qualify, a person only needs to lose two of six activities of daily living (ADL). ADL includes eating, bathing, dressing, toileting, transferring (walking) and continence. There are many advantages and some concerns your client should consider when analyzing how to cover the costs of a long term care stay. To get more information about a Long Term Care Annuity, please contact us at 866.452.3670 or email PIPAC LIFE Brokerage at

Laddering with Annuities

Defined; laddering of annuities is a method of staggering the purchase of annuities in order to take advantage of market conditions, maturities while allowing more diversification and safety in one’s portfolio.

A study by MassMutual Financial Group produced some very interesting retirement income results:
The study, which tested four strategies for managing a retirement income account over 181 time periods (referred to as cases) between 1965 and 2006, found that the three strategies involving an income annuity, whether purchased all at once or over time, generally out-performed the stock and bond-only strategies, regardless of market conditions in the periods studied.

In fact, the investment-only approach, even during strong equity and bond markets ran out of money in 25% of the cases. In contrast the strategy of laddering into a life annuity matched the income goal in 100% of the cases tested. The study also compared growth of the four different investment strategies using market data from 1980 to 2006. The stock and bond portfolio ended with a value of $489,346. The portfolio using laddered annuities ended up at $735,292. This was the highest value of all the strategies that were tested.

Laddering of annuities can be effective when used for accumulation of assets using single-premium deferred annuities (SPDA). Offering your clients different guaranteed periods, allows your clients to take advantage of changes in market conditions. Flexibility and safety are key components when considering the laddering of a SPDA.

Another great reason to use the laddering concept is to create flexibility and potentially more income for retirement. As the MassMutual study proved, laddering of income generated by immediate annuities (SPIA) can in most market situations, create more income and allow more flexibility.

Let us help you understand more about how laddering of annuities can help boost your annuity sales. Call us at 866.452.3670 or email to help your clients gain more flexibility, safety and income by investing in annuities.

Advanced Sales Solutions

Business Continuation Planning

This type of insurance is designed to replace the economic loss associated with the death of employees, or as funding vehicles for ownership buyouts or transfers, or for various estate planning situations.

Business Continuation Life Insurance policies are company or organization funded and owned policies issued on the life or lives of employees whose demise would have a substantial financial impact on the surviving organization’s ability to function and prosper in its future.

These types of life insurance policies provide permanent coverage on the life of the insured.

A portion of the premium paid is credited to a cash value tax deferred cash accumulation account.

Business Continuation Life Insurance Policies Have:

  1. Named owner
  2. Named insured
  3. Named beneficiaries

These three different designations can be the same person, but in many situations they are not necessarily set up with the same designations. Which type designation to use depends on different variables and situations.

An individual, company, or organization can be the owner of these life insurance policies on another person's life only when an individual, company, or organization has an "insurable interest."

Generally, the death benefit payable to a corporate or organization beneficiary is income tax free, however, alternative minimum tax (AMT) might apply.

Key Person

Also known as Key Man Life Insurance, this type of insurance is used when the death of a "Key Employee or Owner" could severely affect the stability or profitability of the company. Many companies do not survive the death of a key employee because the knowledge, contacts, business relationships or financial experience of running a successful operation are hard to replace.

A Key Person Life Insurance policy will give the company working capital to continue daily operations and the financial ability to find a suitable replacement. Sometimes businesses have several key employees who need to be considered for key person coverage due to the impact on the business of a premature unexpected death.

Key Person Life Insurance is purchased by the business, which is also the beneficiary, to help reimburse the business for economic loss when a key person dies.

Both term insurance and cash value life insurance should be considered in the key person analysis. We have several different Key Person Life Insurance plans, including life insurance and disability insurance.

Salary Continuation

This is an arrangement in which an employer agrees to continue payment of an employee's salary (or portion of) for a specific time at the employees death, retirement or disability. The employer may self-insure (dollar-for-dollar) or purchase life insurance (discounted dollars) on the employee with the employer as the beneficiary. Proceeds from the policy would go to pay future salary benefits.

What are the advantages?

  • Tax-Free Death Benefit
  • Helps employer retain and attract key employees
  • No IRS approval
  • Can discriminate
  • Life Insurance Cash Values are an asset to the business
  • Key employees receive benefits at no cost - only taxed when received as ordinary income
  • Does not affect qualified retirement plan deferral amounts
  • Company receives tax deduction when employee receives benefits
  • Can assist in future buyout of the company

It acts as a "golden handcuff" because if the employee leaves employment, the agreement will terminate.

Executive Bonus

These plans offer a way for business owners or companies to provide additional supplemental benefits to key employees of their choice. The benefits usually include life insurance policy death benefits as well as cash value accumulations that can be used as a retirement income supplement. With an executive bonus plan, the business can use tax deductible company funds to selectively provide benefits to key employees or owners. An executive bonus plan, used effectively, can be a valuable tool to attract and retain employees.

Executive bonus plans are simple to design and easy to implement. The executive bonus plan works as follows:
The company provides the key executive with a bonus that is taxable as income to the recipient. The bonus is generally a deductible business expense for the company.
The key employee may choose to use the bonus to purchase a whole life or universal life insurance policy that builds cash value that grows tax deferred.
The life insurance policy, if properly structured, may provide an attractive benefit to the executive in the form of cash value growth. Any cash value accumulation will grow tax deferred and may be accessed by the employee income tax-free through withdrawals and policy loans. The policy cash value can be used to supplement retirement income or for any other financial need.
If the key employee dies, in most cases, their heirs will receive the death proceeds from the life insurance policy income tax free.

Variations of Executive Bonus Plans

  • Double bonus arrangement - the company will provide the key executive with a bonus large enough to pay the life insurance premiums as well as the income taxes incurred by the key employee on the bonus. The company can use the double bonus arrangement to eliminate any out of pocket expense for the key executive.
  • Restrictive or Controlled bonus plan - if the company wishes to maintain some measure of control over the bonus, the controlled (restrictive) bonus design is a good choice. With a controlled executive bonus, the company and the key executive enter into an agreement which includes a vesting schedule on the policy's cash value growth. The vesting schedule is a form of "Golden Handcuffs" that allows a company to limit the availability of the cash value benefits until the employee has fulfilled the terms of the agreement. At that time, the employee is "vested". Once the key employee is vested, they gain full and complete access to the policy's cash values.

Advantages of Executive Bonus (Section 162) plans using life insurance

  • An executive bonus plan is simple to implement and easy to administer.
  • The business can selectively choose the key employees they wish to reward.
  • The bonus payments may be considered a fully deductible expense to the company.
  • The key employee is able to name the beneficiary of the entire death benefit of the life insurance policy.
  • In many cases, unless there is a "restrictive or controlled executive bonus," the key employee will have immediate access to the cash value and may access the cash value without tax through policy loans and withdrawals.
  • Executive bonus plans are not subject to "qualified plan limits."

Disadvantages of Executive Bonuses

  • The company is unable to fully recover its costs from the policy's death benefit since the key employee names the policy beneficiary.
  • Executive bonus plans offer the company very little control of the policy. Even if a restrictive or controlled executive bonus is utilized, it only restricts the key employee's access to the policy's cash values. The bonus is never recovered by the company even if the key employee leaves the company prior to vesting.
  • The key employee must include any bonus in his or her taxable income.
  • Without additional planning, the life insurance policy's death benefit will be included in the key employee's taxable estate.

Employee Stock Option Plan

An employee stock option plan (ESOP) is a tax-qualified retirement program that owns stock of the sponsoring company for the benefit of its employees. It is important to note that an ESOP is subject to the same regulations and limitations as any tax-qualified retirement program, such as a 401(k).

What makes an ESOP different from other plans is that it is effectively used as a corporate finance tool as well as retirement vehicle for its participants. The major distinction between an ESOP and other plans is that an ESOP can borrow money to purchase its sponsor's stock either from shareholders or directly from the company.

Shareholder Advantages of an ESOP:

  • Efficient way to transfer ownership in the company to the employees
  • Advantages to shareholder who elects to hold stock until deceased, estate can use the ESOP to provide a mechanism for the agency to redeem stock on a tax-deductible basis
  • Tax advantages and liquidity opportunities

Company Advantages of an ESOP:

  • Company can raise capital at a reduced cost
  • Leveraged ESOP allows for deduction of both principal and interest costs
  • Agency owners can gain liquidity for all or a portion of their ownership within the agency
  • Ease of accessing capital
  • Substantial tax incentives

Life insurance is commonly used to fund ESOPs repurchase obligation funding. ESOP-owned life insurance is certainly attractive in the short run since the premiums on the insurance will be made with pre-tax dollars (if ERISA limits are complied with). This will also avoid any alternative minimum tax liability if the ESOP is the beneficiary.

The advantages of having corporate owned life insurance (COLI) are significant:

  • Tax-free cash (subject to alternative minimum tax) received as death proceeds and can be loaned to the ESOP, company makes tax-deductible contributions to repay itself
  • Corporation may wish to retire stock, using life insurance
  • Premiums on COLI can become tax-deductible, by having the corporation annually contribute an amount of newly issued shares equal in value to the premiums paid
  • Investment returns of highly rated life insurance companies may be competitive with other conservative investment options

In summary, maintaining the insurance with the corporation as owner, beneficiary and premium payer retains a great degree of flexibility for the corporation, maximizes the tax benefits of COLI, and reduces fiduciary risk.

COLI are fairly complex in nature. Call us at 866-452-3670 or email to help you develop the right solution for your clients interested in exploring the many advantages ESOPs afford their business succession plans.

Irrevocable Life Trusts

An Irrevocable Life Insurance Trust (ILIT) is an irrevocable trust created for the principal purpose of owning a life insurance policy. As with any other trust, the insurance trust is a contract between a grantor and a trustee to administer certain property, in this case an insurance contract, for the benefit of named beneficiaries. The insurance trust, like other irrevocable trusts, cannot be rescinded, amended, or modified in any way after it is created. Once the grantor contributes property to the trust, he cannot later reclaim ownership of the property or change the terms of the trust.

One of the primary reason executing a life insurance trust is estate tax considerations. If an ILIT is properly structured, the death benefits paid to the trust will be free from inclusion in the gross estate of the insured. In addition, the ILIT can also be structured so that the trust will provide benefits to the insured's surviving spouse without inclusion in the surviving spouse's gross estate either.

Procedure to establish life insurance trust:
The following are suggested procedures to establish an insurance trust for purchase and ownership of a life insurance policy:

  1. The need for the irrevocable trust is established.
  2. Terms of the trust are designed including the establishment of beneficiaries and the choosing of both initial and successor trustees.
  3. Medical examination procedures should be commenced. There is no need to draft a trust if clients are not insurable. The insured should not sign anything at this point other than in his or her capacity as insured (i.e., not as the owner or applicant).
  4. Attorney drafts insurance trust.
  5. Client and trustee sign insurance trust. The trustee should apply for employer identification number.
  6. Trustee applies for life insurance and signs application as insurance owner. If the insurance company requires a check with application, the application should not be commenced until the following three steps are completed: (i) the grantor makes initial gift to the insurance trust to cover initial premium; (ii) a checking account is opened in the name of the trust; and (iii) the trustee notifies beneficiaries that a gift is being made to the trust and that they have rights of withdrawal. The demand notice should be given and the period for withdrawals allowed to lapse prior to payment of any premiums to the insurance company.
  7. The Trustee completes the application and pays initial premium.

To help you develop the right solution for your clients interested in exploring the many benefits an ILIT can have with regards to the estate planning process. Call us at 866.452.3670 or email us at

Non-Qualified Deferred Compensation

These plans are used by businesses to supplement retirement planning of specific employees or business owners. NQDC can help attract top executives as well as keep key executives.

One major advantage to (Non-Qualified) deferred compensation plans is that they can escape the non-discrimination rules imposed on qualified plans. That means (small business owners) can offer the plan to a select group of employees, making it a more cost-effective benefit plan than a qualified plan. Administration costs are lower as well because the plans are exempt from the U.S. Department of Labor's reporting requirements. All that is required is a one-time letter to the DOL stating that your plan is in place and has a given number of participants.

Supplemental Executive Retirement Plans (SERP) are considered by executives to be an especially attractive plan because the company foots the bill for the benefits. SERPs generally are structured to mirror defined-benefit pension plans that promise a stated benefit from the employer at retirement. Companies have the option of funding SERPs either through the general assets (at the time of the employee's retirement) or via sinking funds or the preferred use of Corporate Owned Life Insurance (COLI).

Under the COLI funding method, businesses buy life insurance plans on those directors or executives that they wish to compensate. Premiums are paid by the company and upon retirement of the executive or employee, the firm pays out his or her benefits from operating assets for a previously established period. The company is the sole beneficiary of the COLI policy. At death of the employee, the company would receive the death proceeds of the policy tax-free. NOTE: the company will not receive a tax deduction for its contributions to the SERP until the executive/employee actually receives the benefit payments.
A quick review of non-qualified deferred compensation plan advantages:

  • Easy plan adoption
  • Coverage & design flexibility
  • Vesting & forfeiture flexibility
  • Exemption from burdensome tax requirements
  • Partial exemption from ERISA
  • Cash compensation option
  • Supplement to qualified plans

Estate Planning

Estate Planning is the most important step a client can take to ensure their legacy passes intact to their heirs. A professionally designed estate plan allows your client to employ various techniques that can minimize estate settlement costs and satisfy their objectives by:

  • Reducing estate and inheritance tax liability
  • Conserving principal
  • Avoiding costly, frustrating settlement delays
  • Minimize income taxes
  • Reduce probate and administrative costs

Will - The key to your estate planning success
If you die without a will, the state decides how your property is distributed, a troublesome and potentially costly situation for your heirs. Preparing a will is a vital step in your client's estate plan because it insures their wishes will be carried out.

Types of Wills:

  • Simple Will
  • Will with Testamentary Trust

Trusts creates flexibility within the estate planning process
Trusts can be established for:

  • Tax reasons
  • Asset management
  • Charitable purposes
  • Privacy reasons
  • Delay Distributions until a future time or event

Trusts can be established to operate during your client's lifetime or upon death or both. Trusts can be irrevocable (not changeable) or revocable (changeable).

There are many additional reasons your clients will plan (Just to name a few):

  • Passing the family business intact to the next generation
  • Providing an equitable inheritance to all children or grandchildren, when one large asset may not be easily divided
  • Payment of expenses incurred when your client is not able to care for themselves.
  • Payments of income tax due on certain of your client's assets such as qualified retirement plan assets when received by the heirs

There are many ways to pay estate and final expenses (cash, liquidate assets, pay in installments, borrow money, use of discounted dollars).

Advantages of using life insurance inside of an estate plan:

  • Premium payments can be spread out over a period of years
  • Heirs don't have the burden of paying estate settlement costs
  • Proceeds are immediately available when taxes are due
  • Proceeds are free of federal income tax
  • Generally, insurance policy proceeds are free of estate tax, if a third party or an irrevocable trust owns the policy
  • Generally proceeds are not subject to probate expenses
  • Proceeds can replace the financial loss caused by premature death

Buy Sells

A chief concern business owners have is what would happen to the business if one of the owners could no longer continue. Surviving owners generally want to ensure a continuity of ownership and management without having the departing owner's successor thrust upon them. Nor do they want to unduly compromise the liquidity needs of the business by funding a significant buyout. A properly drafted buy-sell agreement can achieve all of these goals by:

  • Providing that upon the occurrence of a specified "trigger event", owners are guaranteed that their interest in the business will be purchased
  • Providing that the owner's interest must be sold to the company, the remaining owners, or a combination of the two
  • Providing a mechanism whereby the purchase price may be determined by market conditions in existence upon the occurrence of the event
  • Providing a funding source, primarily through insurance policies, so that the liquidity needs of the business or its owners will not be onerous
  • Establish a valuation of a deceased owner's interest in the businesss for estate tax purposes

Triggering Events

  • Death or Disability
  • Retirement of the owner
  • Owner Divorce or Bankruptcy

Insurance can be used to provide the funds necessary in a buy out in the event of an owners death or disability. The terms of the buyout will include the determination of disability, the time for payment to the owner or owners estate (beneficiary), whether the entity or the surviving shareholders have the obligation to purchase the interest and whether the funding mechanism, such as life or disability insurance, should be maintained by the entity or the owners personally.

Types of Buy-Sell Agreements:

  • Entity Redemption Agreement - Under this plan, the business entity is obligated to purchase the owner's interest. The entity purchases the life insurance is the owner and beneficiary of the policy on the business owner(s). The proceeds should be received by the entity free of ordinary income taxes, pursuant to IRC, section 101.
  • Cross-Purchase Arrangements - Under this plan, each surviving owner of the business becomes personally obligated to purchase the departing owner's interest. Each owner would buy a life insurance policy on the other owners. At death of one of the owners, the proceeds of the life insurance policy would be received tax-free by the surviving owners and then be used to purchase the deceased owner's interest .
  • The Wait and See Arrangement - Known as the "mixed agreement", attempts to give the entity and its owners maximum flexibility at the time of the triggering event. Generally, the entity has the initial option to purchase the shares from the departing owner in the entity redemption agreement. Should the advantage of the entity redemption outweigh the disadvantages, then the entity shall exercise its right to purchase the owner's interest. If the entity fails to exercise its option, or purchase the owner's interest, then the surviving owners have an option to purchase the departing owner's interest in a cross-purchase arrangement. To the extent that this second option does not result in a complete purchase of the departing owner's interest, then the entity must complete the purchase.
  • Trustee Buy-Sell Arrangement - Very similar to the cross-purchase agreement, but instead of multiple owners buying life policies on each other, it allows the trustee to purchase allowing only one policy per owner to be purchased. At death of one of the owners that policy is used to fund the buyout.
  • Disability Buy Out Arrangement - Policy that finances the purchase of the shares of a totally disabled partner or shareholder (of a closely held company) by the other partners or shareholders.

For a personalized solution for your client's need please contact us at 866.452.3670, or email us at