Supplemental Executive Retirement Plan (SERP)Using Life Insurance

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Supplemental Executive Retirement Plan (SERP)Using Life Insurance

Transcript Of Supplemental Executive Retirement Plan (SERP)Using Life Insurance

Supplemental Executive Retirement Plan (SERP) Using Life Insurance
1 Employer enters into an agreement
with the Executive for the payment of supplemental retirement income. These benefits will be financed with Employer dollars, and may be subject to a “substantial risk of forfeiture.”

Agreement Employer

Employer Non-Deductible
Equity/ Death Benefit
Employer Tax-Deductible
SERP Compensation
4 At retirement,
Executive receives the SERP compensation from the Employer.

Life Insurance Policy
2 Employer purchases a life
insurance policy on the Executive’s life, naming itself owner and beneficiary of this policy. The policy provides a death benefit and tax deferred accumulation of cash values.


3 In the event
of Executive’s death, heirs will either receive annual income or a lump sum payment from the Employer.

What Is Being Accomplished?
For the Employer
• At retirement, Employer receives federal income tax deduction for retirement benefits paid to the Executive.
• Promotes Executive’s loyalty. • Tax deferred growth on accumulation of cash value that may
be used to pay retirement benefits to the Executive.

For the Executive
• Accumulate supplemental retirement income in excess of the qualified plan limits.
For the Heirs
• Provide death benefits if Executive dies.


Supplemental Executive Retirement Plan (SERP)

The Situation
It is a well known fact that the most important assets of any business are its key people. Consequently, it is very important for business owners to find ways of attracting and retaining key executives. Coincidentally, this often occurs at a time when executives are experiencing difficulty in planning for their own retirement. Today’s executives are having trouble accumulating retirement dollars because most savings programs are funded with after-tax dollars, and as a result of the “reverse discrimination” that highly compensated executives experience under qualified plan limits. Also, any gains on these investments are currently taxed, thereby reducing the net yield. However, there is a strategy for this difficult situation.
The Strategy
The Employer enters into a Supplemental Executive Retirement Plan (SERP) with its key executives. Through this arrangement, the Employer agrees to provide supplemental retirement income to selected executives and their families in return for the attainment of agreedupon objectives. Since these benefits are either a mere promise to pay, or are subject to a “substantial risk of forfeiture,” they are not currently taxable to the key executives. However, when this deferred compensation is distributed or is no longer subject to a substantial risk of forfeiture, it becomes tax-deductible to the Employer and reportable as income to the executives or their heirs.
How It Works
The Employer purchases a life insurance policy on the Executive’s life. In accordance with the agreement, the Employer retains all ownership rights in the policy and names itself beneficiary. Generally, the policy creates an income tax-free death benefit* and over time a

tax-deferred accumulation of cash values for the Employer. At retirement, the Executive begins receiving the agreedupon supplemental deferred compensation from the Employer. In the event of the Executive’s death, the Employer can use the death benefit to pay the Executive’s heirs either annual income or a lump sum settlement. By properly structuring a SERP and the policy, the Employer and the Executive will obtain the following advantages:
Employer Advantages • Plan has minimal ERISA requirements, and can
provide selected employees with supplemental benefits.
• The Employer controls the plan, owns the policy and carries the cash value as an asset on its balance sheet.
• The Employer’s cash value accumulates within the insurance policy on a tax-deferred basis.
• Plan benefits are paid with tax-deductible dollars. • The policy can be structured to allow for Employer cost
Executive Advantages • The plan can be custom designed to meet the
Executive’s individual needs.
• Retirement income is accumulated without current taxation to the Executive.
• The plan, through the policy’s death benefit, can be self-completing in the event of the Executive’s death.
• The Executive avoids “reverse discrimination” associated with qualified retirement plans.
*Proceeds from a life insurance policy paid because of the death of
the insured are generally excludable from the beneficiary’s gross income for federal income tax purposes. IRC Sec. 101(a)(1).

Please Note: This brochure is designed to provide introductory information in regard to the subject matter covered. Neither Pacific Life nor its representatives offer legal or tax advice. Consult your attorney or tax advisor for complete
up-to-date information concerning federal and state tax laws in this area.

Supplemental Executive Retirement Plan (SERP)

Vital Information
(To generate a personalized life insurance policy illustration)

Executive ________________________________________________________Date of Birth ___________________________

Spouse___________________________________________________________Date of Birth ___________________________

Risk Status: Insured S ___________ NS ______________

Spouse S ______________ NS ___________

Executive’s Total Compensation $ __________________________________________________________________________

Federal Tax Bracket____________% State Tax Bracket________________%

Retirement: Age __________________________________ Annual Income Goal $__________________________________

Current Sources of Retirement Income:

(A) Qualified Plans $ ______________________________________________________________________________

(B) Non-Qualified Plans $__________________________________________________________________________

(C) Investments $ _________________________________________________________________________________

Estimated Annual Deferred Compensation $_____________ For________________Years

Employer Name__________________________________________________________________________________________

Corporate Status C___________ S _____________

Partnership __________ LLC ____________

Federal Tax Bracket __________ % State Tax Bracket ___________%

Employer Annual Premium Commitment $__________________________________________________________________

Employer Life Insurance Need $ ____________________________________________________________________________


Producer Name: ____________________________________________ Date:________________________________________

In accordance with existing and pending state insurable interest laws the client may not have an insurable interest in the insured unless certain conditions are met. Failure to satisfy state insurable interest requirements may result in disqualification of the policy as “life insurance” under IRC section 7702, and also may among other things void the policy. Furthermore, even assuming compliance with state laws, under pending federal tax legislation, the death benefits of the life insurance policy used in this design may not be income tax free under IRC section 101(a)(1) unless certain conditions are met. These conditions, for both the state and federal level, may include, but not be limited to, the insureds providing written consent to be insured and the insured falling within a certain employee classification or group. Clients proposing this design must consult with legal counsel to determine whether these conditions apply to their situation and, if so, whether these conditions are met.

Pacific Life Insurance Company 700 Newport Center Drive, Newport Beach, California 92660
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