Optimizing a Key Component of Your Benefit Package for Highly Compensated Employees

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1 Optimizing a Key Component of Your Benefit Package for Highly Compensated Employees Group Variable Universal Life Group Life

2 A Different Life Insurance Solution for the Different Needs of Your Highly Compensated Employees Recruiting and retaining the key employees essential to a company s long-term success continues to be a high priority for many employers. They must find innovative ways to create attractive compensation packages that will: Be highly valued by highly compensated employees Effectively meet the needs of highly compensated employees Be affordable for both the employer and its employees A positive step toward this goal is recognizing that benefits strategies that may be well suited for most workers may not be optimum for highly compensated employees. Employers are well served to consider programs that take into account the unique needs of this important group. All things being equal, an employer that offers the most attractive benefits package may have an advantage over the competition when attracting top talent. In fact, research shows that there is a correlation between employee satisfaction with benefits and loyalty to the company. 1 Employers are in a unique position to help employees solve a number of significant financial problems through well-structured benefits programs. For example, many employees do not have enough life insurance to adequately protect their families, and do not know how much life insurance they actually need. They rely on employers to provide coverage or arrange access to supplemental life insurance protection. 71% of employees say it is important for companies to offer benefits, even if employees must pay most or all of the cost. 1 Proper life insurance planning is especially important for highly compensated employees who may have more assets to protect from unforeseen changes to their families earning power, and generally have more complicated estate-planning needs. Employers can help employees by providing programs customized to their needs, along with tools they need to make good decisions. 47% of employees are "very concerned" about having a financial plan. 1 1

3 Getting the Most from Your Life Insurance Program Since employers put significant resources into designing benefit packages, it makes sense for them to ensure that they re getting maximum value from them. A key component of most packages is Group Life insurance. To optimize this program, companies may need to reconsider the role life insurance plays in their highly compensated employees long-term financial planning. If employers are open to innovative alternatives to well-established programs, they can achieve significant advantages for both themselves and their employees. 81% of employees surveyed cite health benefits as important for creating loyalty to their employer. 1 Group Life insurance decisions often center on choosing a carrier that is able to provide the best customer service, plan design and cost usually for term life insurance. Term life effectively provides a death benefit to an employee s family at a critical time. But, there are alternatives to term life insurance that provide additional benefits. One such program that an employer can provide for its highly compensated employees is Group Variable Universal Life (GVUL) insurance. It s different from term life in that it combines life insurance protection with a tax-advantaged investment opportunity. Highly compensated employees often have estate and tax-planning needs that can be better met utilizing the unique features of GVUL. Permanent life insurance such as GVUL, implemented as a group carve-out, may be a good solution for highly compensated employees th Annual MetLife Study of Employee Benefits Trends, To age 95. In some program designs, if the employer replaces MetLife GVUL with group life insurance from another insurer or otherwise terminates the GVUL group contract, your employees GVUL coverage may also be terminated, even after separation from employment or in retirement. 2

4 Why a GVUL Group Carve-Out Is Better for Your Highly Compensated Employees and Your Company Permanent 2 life insurance like GVUL is treated differently from group term for taxation purposes. GVUL takes advantage of current tax laws, allowing participants life insurance coverage plus certain tax advantages not available with term life. Under a GVUL group carve-out, a select group of highly compensated employees is removed, or carved-out, from the wider employee group life insurance plan, and provided with an enhanced program (using individually owned GVUL certificates). The remaining employees continue with their original life benefit. GVUL benefits both employers and the employees who receive the enhanced program. Some of the advantages for employers are: GVUL may be an effective alternative to certain split-dollar life insurance programs that are no longer viable in light of recent regulatory developments. Permanent 2 life insurance allows more responsibility for employees financial wellbeing to be transferred to them, through voluntary, employee-paid coverage designed to supplement what the company is able to provide. GVUL is a cost-effective enhancement to an employer s compensation package. The following is an example of the costs to an employer for its life insurance coverage before and after implementing a GVUL carve-out. GVUL provides an essentially self-funded life insurance retirement plan if employees use the program s cash accumulation feature to prefund life insurance protection into the future. With GVUL, all employee record keeping is done by the carrier, and the employer is relieved of this administrative burden. 3

5 GVUL Adds Value Without Adding Significant Costs Given concerns about controlling costs of benefits programs, employers may not feel that they are in a position to offer their highly compensated employees an enhanced program. Many companies find that GVUL is a cost-effective addition to their benefits package. For example, when Company A asked for a quote and price comparison, their 3,650 employees cost for insurance coverage remained comparable when the company decided to provide GVUL for 571 of its highly compensated employees, with the remaining employees covered under the Basic Term Life program. Under a term-life-only structure, the company provided employees with a combined total of about $661 million of life insurance coverage, costing $1.6 million per year. This worked out to about $.204 per thousand of coverage. Once the company decided to provide its highly compensated employees with GVUL using a group carve-out strategy, the cost per thousand for the remaining basic group was reduced to $.194 per thousand. The reduction occurred because the highly compensated employees were older, on average, than the general employee population, resulting in a more favorable rate for the remaining group. 58% of employers believe benefits are "very important" in retaining employees. 1 4

6 The initial cost decrease for the basic group was offset by a slight increase in cost for GVUL coverage for the highly compensated employees. But, the important consideration is the total overall yearly cost a company pays for its life insurance program. The net result, in this example, is that the company paid approximately $34,260 ($60 per highly compensated employee per year), or 2.12% more, to provide an enhanced GVUL program. Many employers feel that the added value that GVUL provides makes it a good choice for themselves and their highly compensated employees, more than offsetting this slight increase in cost. A Hypothetical Cost Comparison Before and After a Group Carve-out* Total Life Insurance Face Amount Total Cost to Employer Rate / Thousand of Coverage (Monthly)** Before the Carve-Out Basic Life All Employees $661,047,550 $1,618,244 $0.204 After the Carve-Out Basic Group $560,945,550 $1,304,621 $0.194 GVUL Group $100,102,000 $347,883 $0.290 Totals After the Carve-out $661,047,550 $1,652,504 Additional Cost to the Employer $34, % * This example is based on an actual client quote. It is meant to show how a group carve-out works. An employer s actual insurance costs are based on the number of participants, their ages and other factors that vary from employer to employer. Please note that there are generally additional costs associated with GVUL programs that are more fully explained in the product s prospectus. ** Actual GVUL rates are individually age-rated. Please refer to GVUL Cost of Insurance Rates for a detailed description of the individual rates by age. The GVUL rate per $1,000/month shown above does include the administrative fee and premium expense charge. Estimated costs are based on the census data provided from the client. 5

7 GVUL Addresses the Unique Needs of Highly Compensated Employees Research shows that many employees say they are behind on their retirement savings goals. 1 Along with providing life insurance protection, GVUL provides, through its cash accumulation feature, an effective tool to help employees reach a number of important financial goals. GVUL offers participants a tax-advantaged investment opportunity in variable investment portfolios. And, when they invest within their GVUL life insurance policy, participants enjoy several advantages. GVUL allows an additional tax-advantaged program for those who have maximumfunded their qualified plans For highly compensated employees, gaining an additional tax-advantaged investment opportunity, such as the one available within GVUL, is critical because it helps them overcome the built-in limitations of their qualified savings plans. Highly compensated employees are often at a disadvantage when it comes to saving money for the future because of caps imposed on plans such as a 401(k). These limits make it difficult for them to invest in tax-advantaged investment vehicles in the same relative proportions as other employees. As the chart below shows, there are limits to the contributions employees are allowed to make to their 401(k) plans in a given year. There is a significant difference between the percentage of gross income an employee making $60,000 a year can invest versus one making $200,000. But, if a highly compensated employee had GVUL life insurance coverage and invested the maximum allowed in the first year, he or she would be able to invest an additional $22,096 post-tax (assuming the employee is 45 and has $800,000 of GVUL coverage). This GVUL investment, combined with the pretax investment allowed with a qualified plan, results in a total tax-advantaged investment opportunity of $37,096. In this example, GVUL allows the highly compensated employee to close the tax-advantaged investment gap. Closing the Tax-Deferred Gap Employee Salary Maximum Qualified Amount, 2008 Percent of Gross Income, Qualified Maximum GVUL, Policy Year 1 Total Tax- Deferred Opportunity % of Gross Income, Qualified Combined with GVUL $60,000 $15,500 26% n/a $15,500 26% $200,000 $15, % $21,596 $37,096 19% Assumption: The highly compensated employee is 45 years old, with $800,000 of GVUL coverage.

8 GVUL is a flexible, permanent life program that adapts to changing financial needs GVUL allows participants to invest in a wide variety of variable investment portfolios, or an Interest-Bearing Account backed by the financial strength and claims-paying ability of Metropolitan Life Insurance Company. choices take into account various risks that range from lower-risk bond and money market funds to more aggressive growth-oriented options. GVUL allows participants to save for future events such as paying for a child s college education or a new home. Or, because employees have the option to keep GVUL by utilizing its portability feature, it is well suited for long-term financial goals, such as saving for retirement and beyond. 2 GVUL allows the flexibility to accumulate cash value inside the policy that can be used to fund life insurance protection in the future. This is possible because there are no mandatory distributions of cash value required at age 70 1 /2 as with many qualified plans. Investing within GVUL through payroll deduction is a convenient and effective way to save for the future. Payroll deduction has the built-in benefits of dollar cost averaging. Dollar cost averaging brings a disciplined approach to investing a fixed amount at regular intervals. By following this strategy, participants have the potential to: Smooth out the average investment share purchase price over time that comes with the ups and downs of the market, reducing the overall cost. Buy more shares at a lower price, and fewer at a higher price. Enhance the value of an investment portfolio over the long term. However, dollar cost averaging does not guarantee a profit or protect against losses in a declining market. It involves continuous investment in securities regardless of fluctuating price levels. An investor should consider his/her ability to continue purchases in periods of low or fluctuating price levels. 7

9 Other tax advantages of GVUL Since GVUL is permanent life insurance, it allows highly compensated employees a number of key tax advantages under current rules: Any potential investment earnings grow tax deferred inside the policy. Tax deferral has the potential to accelerate earnings buildup as the years go by. The chart below illustrates the power of tax deferral, assuming $300 invested per month ($3,600 per year), and an 8% yearly return over a 25-year period with no withdrawals. The bottom gray line shows money invested over time, the middle blue line shows potential growth, if the investment were taxable at the 25% federal tax rate, and the upper green line shows the potential growth of the investment if tax deferred. Cash Accumulation Taxable vs. Tax-Deferred s 8% Yearly Return over 25 Years $300,000 $275,000 $250,000 $225,000 $200,000 $175,000 $150,000 $125,000 $100,000 $75,000 $50,000 $25,000 $0 Year Tax-Deferred Taxable Cumulative Cumulative $18,000 $36,000 $54,000 $72,000 $90,000 Year Taxable $20,945 $48,975 $86,485 $136,681 $203,856 $274,452 $203,856 $90,000 Tax-Deferred $22,024 $54,385 $101,934 $171,798 $274,452 3 Withdrawals will reduce the death benefit and cash value. In general, if the funding of a certificate exceeds certain limits, it will become a modified endowment contract (MEC) and become subject to earnings first taxation on withdrawals and loans. An additional 10% penalty for withdrawals and loans taken before age 59 1 /2 will also generally apply. Participants are generally permitted to take withdrawals up to the amount of premiums paid without any tax consequences. However, withdrawals in excess of total premiums paid are subject to income tax. Money can be moved among investment portfolios without triggering a taxable event. This enables participants to rebalance their investment portfolios without current tax consequences. Withdrawals can be made from the policy s cash value before age 59 1 /2 without a 10% penalty (subject to federal guidelines). 3 This allows participants the flexibility to withdraw money when it makes sense for them, not as a result of tax rules. Premiums paid to cover the cost of life insurance protection are treated as investment basis. When it s time to withdraw money from the GVUL policy, participants do so in a tax-advantaged manner. The illustration is used only for the purpose of demonstrating how tax-deferred gains can grow faster than taxable gains. It is not intended, nor does it represent, any growth that may occur in the GVUL variable investment portfolios. Money allocated to the variable investment portfolios is subject to market risk and may be worth more or less than the original investment when redeemed. Insurance company asset charges, administrative fees and premium expense charges have not been deducted. The cost of insurance charges, which vary with each individual policy, have not been deducted. Deduction of these charges would result in lower returns. The tax rate used in this chart is a hypothetical tax rate as it might apply to one s marginal taxable income after taking into consideration all taxes owed in a given year. Your actual taxes in a given year may be higher or lower and will vary from year to year depending on your income level, sources and types of income, tax deductions, tax credits, state income taxes, applicability of Alternative Minimum Tax (AMT), and other factors that affect your tax rate. Tax laws are subject to change. Lower maximum tax rates in the future on capital gains and dividends would make the returns on the taxable investment more favorable, thereby reducing the difference in performance between the accounts shown. Gains on investments in mutual funds unrelated to a life insurance policy might qualify for favorable long term capital gains and qualifying dividend tax treatment. Under current law, the tax rates that apply to long-term capital gains and dividends are lower for most taxpayers than the tax rates for ordinary income. While amounts received as deathbenefit proceeds under life insurance contracts are generally not subject to federal income tax, the taxable portion of distributions received while the insured is alive, or as an annuity settlement option, is taxed at ordinary income tax rates. A 10% penalty tax may apply to the taxable portion of certain distributions if you are under age and your certificate is a modified endowment contract (MEC). Please check with your tax advisor for details specific to your situation. You should consider your personal investment horizon and income tax brackets, both current and anticipated, when making investment decisions, as these will 8 further impact individual results.

10 MetLife Delivering Financial Solutions for Clients GVUL has the flexibility to help employers solve a wide range of financial issues for their highly compensated employees. Here are a few examples: A major Southeastern university wanted to supplement its employees retirement savings. They decided to provide a bonus to employees (within the limits allowed for each individual) to invest in GVUL variable portfolios. The bonus is considered current income for participants and taxed accordingly, but potential earnings accumulate on a tax-deferred basis. GVUL not only provided life insurance protection, but gave employees an additional retirement savings program. A leading energy company thought GVUL was a good alternative to deferred compensation. They liked the fact that the payout of the GVUL plan (death benefit and cash value) depends on the solvency and claims-paying ability of the life insurance carrier, whereas deferred-compensation proceeds are tied wholly to the solvency of the employer. A well-known medical foundation replaced its term life insurance, as well as a Survivor Income benefit, with GVUL. They felt that GVUL was an efficient way to combine two programs, while allowing the additional tax advantages of permanent life insurance. One of the nation s leading express mail companies liked the fact that GVUL s portability feature offered a more seamless and cost-effective transition into retirement than the provisions of several other Group Life insurance programs. 9

11 Some Considerations for Determining If Your Company Is Optimizing Its Life Insurance Program for Highly Compensated Employees Do you currently provide the same type of life insurance for all employees? This may not be ideal, since highly compensated employees have unique needs that can be more effectively met with an enhanced program such as GVUL. Do your highly compensated employees need additional resources to enhance their protection and savings needs? Many companies find that qualified plans alone are not enough to meet the savings needs of their highly compensated employees. Are your highly compensated employees already contributing at, or near, the allowed maximum to their 401(k) plans? They may need additional tax-advantaged investment opportunities. Are you concerned about adding additional costs to your benefits programs? Adding an enhanced program like GVUL for highly compensated employees can be a costeffective way to provide an enhanced benefit. MetLife Experience, Expertise, Commitment With 140 years of experience, the MetLife companies serve more than 40 million customers worldwide and over 90 of the top one hundred FORTUNE 500 Companies in the United States. MetLife is the number one life insurer in the U.S., with approximately $3.6 trillion of life insurance in force and serves customers in 6 countries with one goal: to build financial freedom for everyone. As the leading provider of Group Life insurance in the United States, 4 MetLife offers one of the broadest product and service portfolios in the industry. You can feel more confident knowing no other company has the experience, expertise and commitment to meet the needs of you and your employees. Contacting MetLife for More Information If you would like more information about how we can help you optimize your life insurance program for highly compensated employees, please call (800) LIMRA Group Life Market Share Study Q

12 Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. You should seek advice based on your particular circumstances from an independent tax advisor. MetLife, its agents and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may very depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisors regarding your particular set of facts and circumstances. Like most group insurance policies, MetLife group life insurance policies contain certain exclusions, limitations, reductions of benefits and/or terms for coverage. Ask your MetLife GVUL representative or call MetLife GVUL Customer Service [ ] for additional information. Prospectuses for Group Variable Universal Life insurance and its underlying portfolios can be obtained by calling (800) You should carefully consider the information in the prospectuses about the contract s features, risks, charges and expenses, and the investment objectives, risks and policies of the underlying portfolios. Please read the prospectuses and consider this information carefully before investing. Product availability and features may vary by state. All product guarantees are subject to the financial strength and claims-paying ability of Metropolitan Life Insurance Company. Group Variable Universal Life (GVUL) insurance is issued by Metropolitan Life Insurance Company, 200 Park Avenue, New York, NY 10166, and distributed by MetLife Investors Distribution Company (member FINRA), Irvine, CA Securities, including variable products, offered through MetLife Securities, Inc. (member FINRA/SIPC), 200 Park Avenue, New York, NY Metropolitan Life Insurance Company, MetLife Investors Distribution Company, and MetLife Securities, Inc. are MetLife companies. Metropolitan Life Insurance Company 200 Park Avenue, New York, NY (800) Policy Form No and in New York Policy Form No L (exp0709)(All States)(DC,GU,MP,PR,VI) 2008 METLIFE, INC. PEANUTS United Feature Syndicate Inc.