The Retained Earnings Trifecta

Business owners work hard to find success. Their goal is to grow and prosper. They’re in business to generate a profit and they would like to use those profits to provide personal benefits for themselves and their key employees.

One way that business owners can do this is by leveraging business dollars to buy life insurance on his/her life and the life of key employees. The premium paid will reduce their business cash account, and as the cash value of the life insurance grows it becomes an asset on the balance sheet. This process offsets a business owners retained earnings.

If the insured dies, the death benefit received is income tax free (assuming the requirements of IRC Section 101(j) are met) and can be used to help the business survive the death of a key person. The cash value, if any, can be used in the event the key person voluntarily leaves or becomes disabled.

Note that surrendering the cash value will cause the policy to lapse, but it is assumed that the death benefit is no longer needed at this point. Earnings in the policy would be taxable. Surrender charges may reduce the available cash value during the early years of the policy.

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The ideal candidate for the Retained Earnings Trifecta is:

  • a C Corporation with excess retained earnings.
  • a business that requires life insurance coverage on the owner.
  • a business that would like to reduce the need to declare dividends and prevent exposure to the Accumulated Earnings Tax.

There are many business uses of Life Insurance, including:

  • Key Person Insurance
  • Stock Redemption Buy-sell
  • Business Debt Repayment
  • ESOP Repurchase Liability
  • Spit Dollar
  • and, Non-Qualified Executive Benefits

The attached presentation is generally used during a first appointment or at a data gathering session. It will help you define additional details to help you discuss the opportunity with your business owner client or prospect.

As the financial representative you must be in a position to effectively discuss the business uses of life insurance. You want to help a business owner achieve their goals and objectives by identifying the most appropriate options for their business. Each option has a clearly defined benefit.

Part of your story needs to include the process of transferring or selling the life insurance policy to the business owner if/when the life insurance needs of the company change. It will be important for the business owner to know the impact this has to their Financial Statement.

 The attached materials are designed to make the process easy for you!

How does the One for Three Solution work?

  1. It begins with the business purchasing life insurance - making cash premium payments for five years.
  2. Once the business needs are fulfilled, ownership transfers (after policy year five) to the insured-employee.
  3. The new policy owner owns all rights and benefits of the policy.

Understanding the financial impact of each step will help guide you through the planning process, positioning you positively with your business owner client.


This presentation helps you and your client take a journey, exploring how the Retained Earnings Trifecta One for Three Solution works.


Point-of-sale materials have been developed to help you present the Retained Earnings Concept to your business owner prospects and clients.

If you have additional questions or need further support, please contact the Advanced Markets Team.



National Life Group Agents

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Learn all about Retained Earnings through this video program.

 

 

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The companies of National Life Group® and their representatives do not offer tax or legal advice. For advice concerning your own situation, please consult with your appropriate professional advisor.

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