The Cross Endorsement Buy-Sell Plan

Transcription

1 Renting Death To Fund A Cross Purchase Buy-Sell Plan Place Image Here Prepared For: Valuable Product, Inc. Presented By: Advanced Markets John Hancock 197 Clarendon St. Boston, MA Tel.: , Option #3 Fax: AdvancedMarkets@Jhancock.com Insurance products are issued by: Insurance John Hancock products Life Insurance are issued Company by: John (U.S.A.), Hancock Boston, Life Insurance MA and Company securities offered New through York, Valhalla John Hancock NY. Securities Distributors Products LLC distributed through other by John broker/dealers Hancock Insurance Distributors that have a products selling LLC through agreement are issued other with by: broker/dealers John Hancock appointed Distributors Life Insurance by John LLC, Company Hancock 197 Clarendon (U.S.A.), Distributors Street, Boston, LLC, Boston, MA Clarendon MA 02116Street, Boston, MA 02116

2 The Cross Endorsement Buy-Sell Plan John Hancock does New not Yorkguarantee does notthe guarantee accuracy the of accuracy the Cross-Purchase of the Cross-Purchase Buy-Sell system Buy-Sell or the system output. or John thehancock output. John will not Hancock be liable New for York any damages will not be arising liable for from anythe damages use or misuse arising from of this the software use or misuse or from of any this errors software or omissions or from any in the errors same. or John omissions Hancock in the assumes same. John no duty Hancock to update Newthis York software assumes or to no provide duty to update notice of this any software errors in orthe to provide software notice or applicable of any errors changes in thein software the law. or applicable changes in the law. Figures used in this program illustrate various benefit/retirement planning concepts, which are based upon both assumptions and andata provided by byou, you, the client. Your furnishing of accurate data will help enhance the thevalue of of this this analysis. However, all all assumed growth growth rates rates for assets for assets are are based based upon upon information provided and assumed by you and are not a guarantee of the future performance of ofthe life insurance policy. Please review the assumptions page for accuracy of information. This supplemental illustration assumes that the currently illustrated non-guaranteed elements will will continue for for all all years years shown. This This unlikely is to occur to occur and actual results may be more or less favorable than those shown. The actual consequences of a particular planning alternative will depend upon many variables, some of which may not be beaccounted for for or or fully fully described in in this this presentation. Unless Unless otherwise indicated, the the income income tax and tax and generationskipping transfer (GST) tax implications of particular transactions are not reflected in the analysis. A private split dollar arrangement (involved in ina across-purchase buy-sell agreement) first first assumes that that split split dollar dollar concepts work work outside the the traditional employee/employer arrangement. IRS approval is generally not needed to toestablish a asplit dollar plan. Split Split dollar is is not not a special a type type of life of life insurance policy, but is a method of ofsharing or or splitting the thepolicy s death benefit, cash cash value, ownership rights rights and and premium payments. Typically, one one party party will will pay only the annual term cost cost or or economic benefit benefit amount amount of an ofannual annual premium, premium, while the while other party otherwill party pay will the rest. pay the Once rest. theonce agreement the agreement is is terminated, the party advancing the premium payments will recover the cost of of its itspremium payments from either the the cash cash value value or or the the death death benefit of of the life insurance policy. With a traditional split dollar approach, the employer will receive the greater of premiums paid or cash value. On January 3, 2002, the Treasury Department and the Internal Revenue Service published Notice (the Notice ) concerning the thetaxation of of splitdollar arrangements. The Notice announced the intention of the Treasury Department and the IRS to toissue regulations providing guidance regarding the the split- future tax treatment of split-dollar arrangements. On September 11, 2003, the theirs IRSreleased final final regulations ( Final Regulations ) that that generally deliver deliver what the Notice promised. The provisions of of the thefinal final Regulations apply apply only only to split-dollar to arrangements entered entered into into after after September 17, , The The Final Regulations provide two mutually exclusive tax taxregimes for for the the taxation of split-dollar of arrangements: economic benefit benefit regime regime and loan and regime. loan regime. Endorsement method and non-equity collateral assignment split-dollar arrangements will continue to be taxed under Internal Revenue Code ( IRC ) 61 and 83 ( economic benefit regime). Under the economic benefit regime, an anemployee is istaxed on onthe theconomic value of of the the insurance provided to him to him during the course of the arrangement, and the economic value of ofany other benefits provided as asa aresult of of the thetermination of of the thearrangement. All All other types of split-dollar arrangements are taxed under a anew newloan loan regime and and treated treated as a aseries a series of loans of loans subject subject to the toprinciples the principles of IRC of 7872 IRC 7872 unless unless interest accrues at, or in excess of, a statutory rate. This analysis shows conventional economic benefit treatment. The Notice also sets forth new guidelines that will likely result in inan anincrease in in the the valuation of the of the economic benefit benefit cost cost of a of split-dollar a arrangement entered into after January 28, The economic benefit conferred on on a split-dollar a participant (taxed (taxed to the to the extent extent paid paid by an byemployer) an employer) prior prior to the to the termination of the arrangement is ismeasured by bythe thecost cost of of term terminsurance that that would would provide provide the the same same death death benefit benefit as the assplit-dollar the split-dollar arrangement. John Hancock s product illustrations show economic benefit benefit amounts amounts based based on either on either an IRS antable IRSor table John or Hancock's John Hancock's currently currently offered term offered life term life insurance rates. John Hancock s rates may increase in infuture years, and there is isno no guarantee that that John John Hancock will will offer offer term term life life insurance at all atin all in future years. If John Hancock no longer offers term insurance that can be used to value the economic benefit to the participant, it will be valued according to the IRS table. Use of higher John Hancock rates or orirs rates will will result in in a higher a economic benefit amount than than that that shown shown in product in product illustrations using John Hancock rates or IRS rates. Note also that IRS Notice forbids the use of Table 2001 (or the insurer s lower published premium rates) to determine the value of economic benefit for purposes of ofestablishing consideration to tobe bepaid for forthe thetransfer of of the thebenefit, such as as in in reverse splitdollar arrangements. This analysis assumes Notice is inapplicable to the endorsements under a Cross Endorsement Buy-Sell Plan. split- This material does not constitute tax, legal or accounting advice and neither John Hancock nor any of its agents, employees or registered representatives are in the business of offering such advice. It was not intended or written for use and cannot be used by any taxpayer for the purpose of avoiding any IRS penalty. It was written to support the marketing of ofthe transactions or ortopics it it addresses. Anyone interested in in these transactions or or topics should seek seek advice based on his or her particular circumstances from independent professional advisors. Internal Compliance Number: MLI Page 2 of 15

3 This material is authorized for distribution only when preceded or accompanied by a current prospectus for the illustrated product issued by John Hancock Life Insurance Company (U.S.A.), and for John Hancock Trust. The prospectus contains complete details on investment objectives, risk, fees, charges and expenses as well as other information about the investment company which should be carefully considered. Please read the prospectus carefully containing this and other information on the product and the underlying portfolios and consider these factors carefully before investing. Product and/or product features may not be available in all states. In addition to the prospectus, this material must be accompanied by the basic illustration and the client guide for the relevant product. Variable life insurance has annual fees and expenses associated with it in addition to life insurance related charges including surrender charges and investment management fees. Variable life insurance is unsuitable as a short term savings vehicle. The primary purpose of Variable life insurance is to provide lifetime protection against economic loss due to the death of the insured person. Please have your clients consult with their professional advisors to find out which type of life insurance is more suitable. This material is for informational purposes only. Although many of the topics presented may involve legal, tax, accounting, or other issues, neither John Hancock Life Insurance Company (U.S.A.), John Hancock Distributors LLC nor any of their agents, employees, registered representatives or registered representatives affiliated through a selling agreement are in the business of offering such advice on these issues. You should consult with your professional advisors on the legal, tax, accounting, or financial planning aspects of the topics presented. Page 3 of 15

4 TABLE OF CONTENTS A. Renting Death To Fund A Cross Endorsement Buy-Sell Plan B. Flowchart of Renting Death To Fund A Cross Endorsement Buy-Sell Plan C. Census Summary D. The Cross Endorsement Buy-Sell Plan - Ledger E. Technical Summary F. Assumptions G. Glossary Page 4 of 15

5 RENTING DEATH BENEFIT TO FUND A CROSS ENDORSEMENT BUY-SELL PLAN THE PROBLEM Many closely-held businesses do not make formal plans for transitioning the business in the event of the premature death of a business owner, the lifetime transfer or sale of the business, or the retirement of one of the key business owners. Lack of planning can cause a business to fail because of the significant changes that are brought about due to some or all of these triggering events. THE SOLUTION By utilizing a private split dollar cross endorsement buy-sell arrangement funded with a permanent life insurance policy, the funds required to transfer the business efficiently as a result of one of these triggering events will be available. A cross endorsement buy-sell arrangement is a buy-sell plan that provides you and your family the liquidity needed to transfer the business when one of the business owners dies prematurely. However, since you own your own life insurance policy under this type of arrangement, you can use the policy s cash values to supplement retirement income 1. Depending on your changing needs, your policy can also provide your family the estate liquidity needed as a result of the wealth your business creates. Clearly, a permanent life insurance policy is a flexible financial tool that can address your changing needs over the life of the business. HOW IT WORKS Under a cross endorsement buy-sell arrangement, you purchase and own a life insurance policy on your life while your business partners purchase and own a policy on each of their respective lives. The value of each policy will be based on the projected value of the business and each business owner s proportional interest in the business. To minimize the owners' out-of-pocket costs to pay premiums, your company may make annual bonus payments to each business owner in the amount of the premium. Each business partner will endorse 2 or rent out all or a portion of the death benefit on their policy to each of the other partners. You and each of your business partners will pay a rental charge to each other for the amount of death benefit being endorsed. Consequently, each business owner will recognize rental income in the amount of the rental charge. Endorses Death John Hancock Life Insurance Company (U.S.A.) Pays Rental Charge Pays Rental Charge Business Owner 2 Business Owner 1 Endorses Death John Hancock Life Insurance Company (U.S.A.) 1 Loans and withdrawals will reduce the death benefit, cash surrender value, and may cause the policy to lapse. Lapse or surrender of a policy with a loan may cause the recognition of taxable income. Policies classified as modified endowment contracts may be subject to tax when a loan or withdrawal is made. A federal tax penalty of 10% may also apply if the loan or withdrawal is taken prior to age 591/2. Cash value available for loans and withdrawals may be more or less than originally invested. 2 Each owner may desire to endorse one hundred percent (100%) of the death benefit to the other owners during the buy-sell period. The split dollar final regulations are silent as to whether this is permissible. Clients should consult their tax advisors to discuss this issue. Page 5 of 15

6 RENTING DEATH BENEFIT TO FUND A CROSS ENDORSEMENT BUY-SELL PLAN The value of the rental charge is based on the economic benefit cost of the death benefit which initially represents only a fraction of the premium. The economic benefit cost is measured annually using either a government or insurance company rate table. Essentially, you will pay a rental charge based on the attained age of the other owner and the amount of the death benefit he or she is endorsing to you, and vice versa. When the cross endorsement buy-sell plan is terminated, the rental charges stop and each business owner retains their respective policy. While the buy-sell plan is in place, the life insurance proceeds are to be paid to each surviving owner to fund the buy-sell obligation. However, if the plan is terminated, you can continue to own your policy and use the policy cash values to supplement retirement income. You can also retain the policy to cover your estate tax liability. Although the life insurance proceeds are includible in the taxable estate for estate tax purposes, during the Buy-Sell term, your estate receives a corresponding deduction for the liability associated with the Buy-Sell plan. BENEFITS Buy-Sell Cash is available for the efficient transfer of the business due to an owner s death, retirement, or sale of the business is available when needed. Flexibility of permanent insurance Permanent insurance provides the flexibility needed to transition the business based on your changing needs over your life span, tax efficient access to policy values for supplemental retirement income, and/or estate liquidity. CONSIDERATIONS Cash flow Cash flow to fund premiums is required. Increasing economic benefit cost The economic benefit costs increase with age and may be significant in later years. Split Dollar Final Regulations Under the split dollar final regulations, the economic benefit amounts received by each owner will be treated as rental income and taxed at ordinary income tax rates. In essence, the sum of all anticipated economic benefit amounts represents twice-taxed dollars. The present value of the combined income taxes on the sum of all anticipated economic benefits is essentially an option price the parties have agreed to at the outset to purchase the flexibility provided by the Cross Endorsement Buy-Sell Arrangement. Clients should consult their tax advisors to discuss this issue. Cash Value Restriction The owners may want to add a provision to the buy-sell agreement restricting a policy owner s ability to access policy cash values during the buy-sell period. Such a restriction may limit access to cash values only to the extent that withdrawals and/or loans will not adversely impact the amount of death benefit endorsed to the other owners to the arrangement. In addition, the owners may want to add a restrictive endorsement to each policy to so restrict such access. Clients should consult their tax advisors to discuss this issue. Potential Transfer For Value The owners may want to consider a partnership (if one does not already exist) between the owners to avoid any transfer for value issues with respect to the cross endorsements of the policy death benefits. Clients should consult their tax advisors to discuss this issue. Long Term Care Rider If you are considering creating a policy with a long-term care rider where the owner is not the insured, there may be adverse consequences - both tax and contractual in nature. You should review the particulars of your intended ownership arrangement with your legal and tax counsels in light of the income, gift, and estate tax provisions of the Internal Revenue Code PLANNING OPTIONS The following flowcharts and ledger pages illustrate the plan mechanics and the costs and benefits of the private split dollar cross-endorsement buy-sell plan to the business and each business owner. Page 6 of 15

7 RENTING DEATH BENEFIT TO FUND A CROSS ENDORSEMENT BUY-SELL PLAN PROPOSED PLAN Sue Pays Rental Charge to Jim $792 Sue Lester Sue Endorses Death to Jim $1,200,000 Jim Pays Rental Charge to Sue $624 Jim Endorses Death to Sue $1,200,000 Jim Smith John Hancock Life Insurance Company (U.S.A.) Shareholders rent a portion of their death benefit to each other equal to the each shareholder ownership in the company See attached Glossary of Ledger Terms Page 7 of 15

8 RENTING DEATH BENEFIT TO FUND A CROSS ENDORSEMENT BUY-SELL PLAN COMPANY INFORMATION Company Name... Valuable Product, Inc. CENSUS SUMMARY Shareholder Name Age Sex Risk Class Fair Market Value... Growth Rate... Ownership In Company Initial Premium $2,400, % Initial Face Amount Amount Endorsed 1. Jim Smith 47 Male Preferred NonSmoker 50.00% $17,184 $1,200,000 $1,200, Sue Lester 43 Female Preferred NonSmoker 50.00% 13,135 1,200,000 1,200, % $0 0 $ % % $0 0 $0 Totals % 30,319 2,400,000 2,400,000 BREAKDOWN OF LIFE INSURANCE ENDORSED New Allocation Death Share 1. If Jim Smith Dies Sue Lester % $1,200, % $1,200,000 Sue Existing Allocation 50.00% New Allocation % 2. If Sue Lester Dies Jim Smith % $1,200, % $1,200,000 Jim 50.00% % If Dies Jim Smith 50.00% $0 Sue Lester 50.00% $ % $0 If Dies Jim Smith 50.00% $0 Sue Lester 50.00% $0 0.00% $ % $0 If Dies Jim Smith 50.00% $0 Sue Lester 50.00% $0 0.00% $ % $0 See attached Glossary of Ledger Terms Page 8 of 15

9 SUMMARY OF CROSS ENDORSEMENT BUY-SELL PLAN COMPANY INFORMATION Company Name... Valuable Product, Inc. Fair Market Value... $2,400,000 Growth Rate % COSTS SUMMARY BY RELEASE YEAR 18 Cross Purchase Cost Rental Life Insurance Cost Shareholders Rental Charges Charges Paid Collected Net Outlay Premium Net Outlay 1. Jim Smith 20,676 28,608 (7,932) 309, , Sue Lester 28,608 20,676 7, , , Totals: $49,284 $49,284 $0 $545, ,742 Net Present Value of Cost (5.00%): $30,396 $30,396 CROSS PURCHASE COST COMPARISON 30,000 25,000 20,000 15,000 10,000 5,000 - Jim Smith Sue Lester Rental Charges Paid Rental Charges Collected This is a SUPPLEMENTAL illustration only and is not intended to predict or project actual performance. This illustration is not valid unless accompanied by the BASIC PERSONALIZED HYPOTHETICAL individual illustration and the prospectus for the relevant product. The prospectus contains complete details on investment objectives, risks, fees, charges and expenses as well as other information about the investment company which should be carefully considered. Please read the prospectus carefully containing this and other information on the product and the underlying portfolios and consider these factors carefully before investing. Product and/or product features may not be available in all states. This illustration is not intended to be accounting, legal, or tax advice. Clients should consult their accounting, legal, and tax advisors about their particular circumstances before implementing any recommendations. Page 9 of 15 See attached Glossary of Ledger Terms

10 CROSS ENDORSEMENT BUY-SELL PLAN FOR JIM SMITH John Hancock's Accumulation VUL 14 V with Initial Death of $1,200,000 & Initital Premium of $17,1840 POLICY DETAILS RENTAL CHARGES PAID TO OTHER OWNERS Jim Smith Sue Lester Yr Att. Age Annual Premium Cash Value Total Death Charges Collected Charge Paid Net Outlay Rental Charge Death , ,200, , ,200, , ,200, , ,200, ,184 4,653 1,200, , ,200, ,184 18,720 1,200, , ,200, ,184 35,596 1,200,000 1, , ,200, ,184 51,353 1,200,000 1, , ,200, ,184 71,428 1,200,000 1, , ,200, ,184 91,917 1,200,000 1, , ,200, , ,669 1,200,000 1,296 1,008 16,896 1,008 1,200, , ,047 1,200,000 1,404 1,068 16,848 1,068 1,200, , ,241 1,200,000 1,560 1,140 16,764 1,140 1,200, , ,444 1,200,000 1,740 1,212 16,656 1,212 1,200, , ,660 1,200,000 1,920 1,296 16,560 1,296 1,200, , ,948 1,200,000 2,124 1,404 16,464 1,404 1,200, , ,346 1,200,000 2,328 1,560 16,416 1,560 1,200, , ,665 1,200,000 2,532 1,740 16,392 1,740 1,200, , ,219 1,200,000 2,772 1,920 16,332 1,920 1,200, , ,058 1,200,000 3,036 2,124 16,272 2,124 1,200, ,406 1,200, ,108 1,200, ,162 1,200, ,548 1,200, ,249 1,200, ,256 1,200, ,553 1,200,000 0 Totals: 309,312 28,608 20, ,380 20, For: Jim Smith, Male Age 47, Preferred NonSmoker See attached Glossary of Ledger Terms Page 10 of 15 This is a SUPPLEMENTAL illustration only and is not intended to predict or project actual performance. This illustration is not valid unless accompanied by the BASIC PERSONALIZED HYPOTHETICAL individual illustration and the prospectus for the relevant product. The prospectus contains complete details on investment objectives, risks, fees, charges and expenses as well as other information about the investment company which should be carefully considered. Please read the

11 CROSS ENDORSEMENT BUY-SELL PLAN FOR JIM SMITH John Hancock's Accumulation VUL 14 V with Initial Death of $1,200,000 & Initital Premium of $17,1840 POLICY DETAILS RENTAL CHARGES PAID TO OTHER OWNERS Jim Smith Sue Lester Yr Att. Age Annual Premium Cash Value Total Death Charges Collected Charge Paid Net Outlay Rental Charge Death ,151 1,200, ,055 1,200, ,214 1,200, ,604 1,200, ,177 1,200, ,562 1,200, ,014 1,200, ,496 1,200, ,971 1,200, ,389 1,200, ,697 1,200, ,815 1,200, ,598 1,200, ,878 1,200, ,511 1,200, ,339 1,200, ,173 1,200, ,746 1,200, ,993 1,200, ,821 1,200, ,100 1,200, ,555 1,200, ,797 1,200, ,314 1,200, ,613 1,200,000 0 Totals: 309,312 28,608 20, ,380 20, For: Jim Smith, Male Age 47, Preferred NonSmoker See attached Glossary of Ledger Terms Page 11 of 15 This is a SUPPLEMENTAL illustration only and is not intended to predict or project actual performance. This illustration is not valid unless accompanied by the BASIC PERSONALIZED HYPOTHETICAL individual illustration and the prospectus for the relevant product. The prospectus contains complete details on investment objectives, risks, fees, charges and expenses as well as other information about the investment company which should be carefully considered. Please read the

12 CROSS ENDORSEMENT BUY-SELL PLAN FOR SUE LESTER John Hancock's Accumulation VUL 14 V with Initial Death of $1,200,000 & Initital Premium of $13,1350 POLICY DETAILS RENTAL CHARGES PAID TO OTHER OWNERS Sue Lester Jim Smith Yr Att. Age Annual Premium Cash Value Total Death Charges Collected Charge Paid Net Outlay Rental Charge Death , ,200, , ,200, , ,200, , ,200, ,135 4,846 1,200, , ,200, ,135 15,997 1,200, , ,200, ,135 29,275 1,200, ,008 13,351 1,008 1,200, ,135 41,964 1,200, ,068 13,363 1,068 1,200, ,135 56,966 1,200, ,140 13,387 1,140 1,200, ,135 72,899 1,200, ,212 13,399 1,212 1,200, ,135 90,125 1,200,000 1,008 1,296 13,423 1,296 1,200, , ,107 1,200,000 1,068 1,404 13,471 1,404 1,200, , ,042 1,200,000 1,140 1,560 13,555 1,560 1,200, , ,826 1,200,000 1,212 1,740 13,663 1,740 1,200, , ,497 1,200,000 1,296 1,920 13,759 1,920 1,200, , ,028 1,200,000 1,404 2,124 13,855 2,124 1,200, , ,528 1,200,000 1,560 2,328 13,903 2,328 1,200, , ,930 1,200,000 1,740 2,532 13,927 2,532 1,200, , ,385 1,200,000 1,920 2,772 13,987 2,772 1,200, , ,948 1,200,000 2,124 3,036 14,047 3,036 1,200, ,060 1,200, ,614 1,200, ,609 1,200, ,070 1,200, ,002 1,200, ,414 1,200, ,305 1,200,000 0 Totals: 236,430 20,676 28, ,362 28, For: Sue Lester, Female Age 43, Preferred NonSmoker See attached Glossary of Ledger Terms Page 12 of 15 This is a SUPPLEMENTAL illustration only and is not intended to predict or project actual performance. This illustration is not valid unless accompanied by the BASIC PERSONALIZED HYPOTHETICAL individual illustration and the prospectus for the relevant product. The prospectus contains complete details on investment objectives, risks, fees, charges and expenses as well as other information about the investment company which should be carefully considered. Please read the

13 CROSS ENDORSEMENT BUY-SELL PLAN FOR SUE LESTER John Hancock's Accumulation VUL 14 V with Initial Death of $1,200,000 & Initital Premium of $13,1350 POLICY DETAILS RENTAL CHARGES PAID TO OTHER OWNERS Sue Lester Jim Smith Yr Att. Age Annual Premium Cash Value Total Death Charges Collected Charge Paid Net Outlay Rental Charge Death ,678 1,200, ,530 1,200, ,861 1,200, ,643 1,200, ,853 1,200, ,265 1,200, ,009 1,200, ,035 1,200, ,247 1,200, ,564 1,200, ,901 1,200, ,177 1,200, ,312 1,200, ,231 1,200, ,858 1,200, ,107 1,200, ,892 1,200, ,115 1,200, ,685 1,200, ,490 1,200, ,360 1,200, ,011 1,200, ,342 1,200, ,226 1,200, ,473 1,200,000 0 Totals: 236,430 20,676 28, ,362 28, For: Sue Lester, Female Age 43, Preferred NonSmoker See attached Glossary of Ledger Terms Page 13 of 15 This is a SUPPLEMENTAL illustration only and is not intended to predict or project actual performance. This illustration is not valid unless accompanied by the BASIC PERSONALIZED HYPOTHETICAL individual illustration and the prospectus for the relevant product. The prospectus contains complete details on investment objectives, risks, fees, charges and expenses as well as other information about the investment company which should be carefully considered. Please read the

14 ASSUMPTIONS Value Explanation PLAN INFORMATION Company Name Valuable Product, Inc. Names of the heirs Company's Fair Market Value Company's Growth Rate Company's Tax Bracket $2,400, % 35.00% Corporations Tax Rate Endorsement Arrangement Release Year Between Executives 18 Year in which the Buy-Sell agreement is to be terminated Economic Table to Use Lesser YRT JH Alternative Rate or Table 2001 Net Present Value Rate Focus Year * 5.00% 18 Focus Year PRESENTER INFORMATION Presenter's Name Advanced Markets Name of presenter Agency Name John Hancock Address 197 Clarendon St. City State, ZIP Boston, MA Telephone , Option #3 Fax Address AdvancedMarkets@Jhancock.com JIM SMITH Status Last Name Active Jim Smith Name of family Age 47 Age of the first client (required) Sex Male Sex of the first client (required) Risk Class Preferred NonSmoker Underwriting class of the first client (required) Vitality Status Company Ownership See basic illustration 50.00% Company Ownership State of Residence California State of Residence Client's Tax Bracket 35.00% Client's Tax Rate Policy Name Initial Policy Death Policy Premium Years for Premiums** Net Policy Rate SUE LESTER Status Last Name Age Sex Risk Class Vitality Status Company Ownership State of Residence Client's Tax Bracket Accumulation VUL 14 V 1,200,000 17, % Active Sue Lester 43 Female Preferred NonSmoker See basic illustration 50.00% California 35.00% Name of family Age of the first client (required) Sex of the first client (required) Underwriting class of the first client (required) Company Ownership State of Residence Client's Tax Rate Policy Name Initial Policy Death Policy Premium Years for Premiums** Net Policy Rate Accumulation VUL 14 V 1,200,000 13, % * The focus year refers to the year that has been chosen by you. The values in the focus year are highlighted, can be changed and are for your convenience only. The year may be life expectancy, a random year, or a year that coincides with your personal planning goals. ** Years to pay premium is a hypothetical calculation. Premiums payments are the responsibility of the policy owner and are always payable for the life of the policy. However, the cash values may, depending on the future performance, grow to a level where the premiums due may be paid from the policy's cash values. The policy's cash values are not guaranteed. Actual growth may be more or less favorable. Failure to pay premiums when due may cause the policy in question to lapse. Page 14 of 15

15 GLOSSARY OF LEDGER TERMS - CROSS ENDORSEMENT BUY-SELL PLAN Cross Endorsement Buy-Sell Plan This type of plan is an agreement in which each owner agrees to purchase a life insurance policy on his or her life in the amount of the owner s percentage interest in the company, or in a higher amount. The owners then cross endorse, or rent out, a portion of the death benefit to each other to fund the provisions outlined in the buy-sell plan. The value of the rental charge is based on the economic benefit cost of the death benefit being endorsed, which initially represents only a fraction of the premium. Census Summary The Census Summary is a listing of each of the owners of the company, their ages and risk class as well as each owner s current ownership percentage in the company. Initial Premium This column under the Census Summary shows the premium required on each business owner s policy based on the total death benefit purchased. Initial Face Amount This column under the Census Summary shows the amount of the death benefit each individual owner owns on his or her life. The death benefit may be either equal to the business owner s ownership percentage or a higher amount, if needed for other purposes. Amount Endorsed This column under the Census Summary illustrates the total amount of each business owner s policy death benefit that is being endorsed to the other owners. Breakdown of Life Insurance Endorsed This section illustrates the reallocation (New Allocation) of outstanding death benefit (Death Share) to the surviving owners based on a given owner s death. Costs Summary By Release Year This summary chart illustrates the net costs (outlay) of the cross endorsement buy-sell plan to each owner based on the total rental charges each owner pays for the total death benefit endorsed to him or her by the other owners as well as the rental charges received for the amount of death benefit each owner endorses to the other(s). The release year is the year in which the buy-sell plan is terminated and the endorsements are released. The release year is dependent on your particular needs and may be based on a retirement age or the year in which the business is expected to be sold. Transfer for Value Rule If an insurance policy is transferred for valuable consideration, the death benefit will be excluded from income to the extent of the consideration and the premiums subsequently paid by the transferee. The balance of the death benefit will be taxable as ordinary income, unless one of the following exceptions to the rule applies: 1) transfer to the insured, 2) transfer to a partner of the insured, 3) transfer to a partnership in which the insured is a partner, 4) transfer to a corporation in which the insured is a shareholder or officer, or 5) transfer in which the transferee carries over the transferor's basis in the policy. Charges Paid This column under Policy Details section of ledger represents the cumulative fees charged by the other owners for the endorsement of the death benefit on their policies. Charges Collected This column under Policy Details represents the total fees a given owner receives as rental income for endorsing a portion of his or her policy death benefit to the other owners. Net Outlay This column shows the net out-of-pocket cost to a given owner based on rental charges paid for other policies and rental charges received on the death benefit endorsements. Rental Charges Paid To Other Owners This section illustrates the rental charges paid to each of the other business owners for their endorsement of the death benefit on the policies they own. Rental Charge The rental charge amount shown under Rental Charges Paid To Other Owners section is the rental charges paid to each of the other business owners for their endorsement of the death benefit on the policies they own. The sum of the Rental Charge column for each of the policies endorsed to the given owner is equal to the Charges Paid column. Page 15 of 15