INDIVIDUAL LIFE INSURANCE

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INDIVIDUAL LIFE INSURANCE A Consumer Resource
401(k) Overlay Planning
Recruiting, Rewarding and Retaining Key
Executives with Customized SolutionsUsing Life
Insurance
This information is written in connection with
the promotion or marketing of the matter(s)
addressed in this material. The information
cannot be used or relied upon for the purpose of
avoiding IRS penalties. These materials are not
intended to provide tax, accounting or legal
advice. As with all matters of a tax or legal
nature, you should consult your own tax or legal
counsel for advice.
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PROBLEM
Highly Compensated EmployeesMay Not Have Enough
Retirement Income to Maintain Their Standard of
Living

• Social Security replaces only a fraction of
  income
• 401(k) rules restrict how much a highly
  compensated employee can defer

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PROBLEM
A 401(k) Plan Doesnt Bridge the Gap for Highly
Compensated Employees Because of

• Annual 401(k) Salary Deferral Limit
• Limits amount a plan participant can defer
• 2008 limit is 15,500
• Non-Discrimination Rules
• Highly compensated employees can onlydefer 2
  more than the average contributedby non-highly
  compensated employees

Participants who are at least 50 years old in
2008 may be able to use catch-up provisionsto
contribute 20,500 to the qualified 401(k).
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PROBLEM
If a 401(k) Participant Sends a Contribution in
Excess of the Amount Eligible to be Contributed
to the Plan, What Happens?

• - The excess amount is returned to the
  participant
• What if there is a strategy that allows the
  excess amount to be invested for supplemental
  retirement income?

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STRATEGY

• 401(k) OVERLAY PLANNING . . .
• Benefits the Employer
• Benefits the Employee

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BENEFITS OF 401(k) OVERLAY PLANNING TO EMPLOYER

• Helps RECRUIT, REWARD and RETAINKey Employees
  by
• Providing a supplemental retirement income plan
• Using the employer match to help retainkey
  employees (Golden Handcuffs)
• Employer Selects Participants
• Should limit to a select group of highly
  compensated employees

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BENEFITS OF 401(k) OVERLAY PLANNING TO HIGHLY
COMPENSATED EMPLOYEES

• Defers Income Tax
• Reverses Qualified Plan Discrimination
• No limit on how much employees can defer
• Employees Can Set Aside Additional Amounts to
  Supplement Retirement Income
• Helps ensure a certain standard of livingduring
  retirement

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HOW A 401(k) OVERLAY PLAN WORKS

• Employee elects to defer a set amount or percent
  of compensation
• Amounts in excess of the 401(k) deferral limit go
  into the 401(k) Overlay Plan
• Employer contributions are not deductible
• Optional employer match
• Employer can use contributions to pay premiums on
  a life insurance policy

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401(k) OVERLAY PLAN INFORMALLY FUNDED WITH LIFE
INSURANCE

• If the Employee Dies Prior to Retirement,the
  Employer
• Generally receives the federal income tax-free
  death benefit (see 101(j) provisions)
• Pays the employees named beneficiary a survivor
  benefit equal to the 401(k) Overlay Plan balance
• Fully taxable as ordinary income to beneficiary
• Uses remaining policy death benefit as it sees fit

Although the death benefit is not subject to
regular corporateincome taxes, the corporate
alternative minimum tax could apply.
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401(k) OVERLAY PLAN INFORMALLY FUNDED WITH LIFE
INSURANCE

• If the Employee Reaches Retirement Age
• Employer accesses the policys account value
  through tax-advantaged loans and withdrawals and
  pays benefitsto the employee
• If employee dies after benefits have begun, the
  remaining benefits are paid to the employees
  plan beneficiary
• Benefits received by the employee or his/her
  beneficiary are fully income taxable.

Life insurance policies contain fees and
expenses, including cost of insurance,
administrative fees and premium loads, surrender
charges and other charges or fees that will
impact policy values. Variable universal life
insurance policies also have additional charges
and fund operating expenses. Both the investment
return and principal value will fluctuate so that
shares, when redeemed, may be worth more or less
than their original cost.
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401(k) OVERLAY PLAN INFORMALLY FUNDED WITH LIFE
INSURANCE

• Remember
• Both loans and withdrawals from a permanent life
  insurance policy may be subject to penalties and
  fees and, along with any accrued loan interest,
  will reduce the policy's Account Value and Death
  Benefit. Depending upon the performance of a VUL
  policy's investment choices, the Account Value
  may be worth more or less than the original
  amount invested in the policy. Assuming a policy
  is not a Modified Endowment Contract (MEC), loans
  are free from current Federal taxation and
  withdrawals are taxed only to the extent that
  they exceed the policyowners basis in the
  policy. Distributions from MECs are subject to
  Federal income tax to the extent of the gain in
  the policy and taxable distributions are subject
  to a 10 additional tax, with certain exceptions.

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CASE STUDY FOR ABC INC.

• ABC has 4 key employees
• Each is contributing the maximum deferral amount
  to ABCs 401(k) Plan

Age Salary
CEO/Owner 48 300,000 VP/Sales 43 225,000 CFO
47 200,000 AVP/Sales 38 175,000
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CASE STUDY (CONT.)

• Each would like to defer 10 of salarytowards
  retirement

401(k) Preferred Max. Deferral
Deferral Shortfall
CEO 15,500 30,000
14,500 VP/Sales 15,500 22,500
7,000 CFO 15,500 20,000
4,500 AVP/Sales 15,500 17,500
2,000
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CASE STUDY (CONT.)

• ABC Inc. creates a 401(k) Overlay Plan to handle
  the excess deferrals

Amount Deferred to 401(k) Overlay Plan
CEO 14,500 VP/Sales
7,000 CFO 4,500 AVP/Sales
2,000

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CASE STUDY (CONT.)

• ABC Inc. will match 25 of amountsdeferred to
  401(k) Overlay Plan

401(k)Overlay Deferral
TotalPlan Contribution
Employer Match
Age
CEO 14,500 3,625 18,125
48 VP/Sales 7,000 1,750 8,750 43 CFO
4,500 1,125 5,625 47 AVP/Sales
2,000 500 2,500 38
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WHY INFORMALLY FUND THE 401(k) OVERLAY PLAN
WITH LIFE INSURANCE?

• Tax-Deferred Accumulation
• ABC Inc. could avoid being currently income taxed
  on any Policy Account Value accumulation that may
  occur.
• Income Tax-Free Death Benefit (to Employer)
• Tax-Advantaged Distributions (to Employer)
• Combination of tax-deferred accumulation and
  tax-advantaged distributions through the use of
  loans and withdrawals permits ABC Inc. to pay out
  a potentially greater benefit compared to
  traditional methods.

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Employer Owned Life Insurance

• Internal Revenue Code Section 101(j) (IRC
  Section 101(j)) states
• Death benefits from an employer-owned life
  insurance contract are subject to federal income
  tax in excess of premiums and other amounts paid,
• Unless the notice and consent requirements of
  section 101(j)(4) are satisfied and an exception
  under section 101(j)(2) applies.
• An employer-owned life insurance contract is
  a contract that
• is owned by a person engaged in a trade or
  business (policyholder) under which the
  policyholder (or a related person) is directly or
  indirectly a beneficiary under the contract, and
• covers the life of an insured who is an employee
  with respect to the trade or business of the
  policyholder. For these purposes, the term
  employee means all employees, including
  officers and highly compensated employees, as
  well as directors.

• Notice and consent is generally satisfied if,
  before the contract is issued, the employee
• is notified in writing that the policyholder
  intends to insure the employees life and the
  maximum face amount for which the employee could
  be insured at the time the contract was issued,
• provides written consent to being insured under
  the contract and that such coverage may continue
  after the insured terminates employment, and
• is informed in writing that the policyholder (or
  a related party) will be a beneficiary of any
  proceeds payable upon the death of the employee.

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Employer Owned Life Insurance

• After the notice and consent requirements have
  been met, the death benefit of an employer-owned
  life insurance contract will not be taxable
  provided that
• (A) (i) the insured was an employee, with respect
  to the policyholder at any time during the
  12-month period before the insured's death, or
• (ii) the insured is, at the time the contract is
  issued
• a director,
• a highly compensated employee within the meaning
  of Section 414(q) (without regard to paragraph
  (1)(B)(ii) thereof), or
• a highly compensated individual within the
  meaning of Section 105(h)(5), except that 35
  percent shall be substituted for 25 percent in
  subparagraph (C) thereof.
• (B) the death proceeds paid to insured's heirs as
  contemplated under IRC Section 101(j) (2)(B).
• (C) the death proceeds are used to purchase an
  equity (or capital or profits) interest in the
  applicable policyholder from certain of the
  insured heirs
• Section 6039(I) also imposes annual reporting and
  record keeping requirements on
• employers that own one or more employer-owned
  life insurance contracts.

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The Hartford is The Hartford Financial Services
Group, Inc. and its subsidiaries, including the
issuing companies of Hartford Life Insurance
Company (HLI) (New York) and Hartford Life and
Annuity Insurance Company (HLA) (Outside New
York), Simsbury, CT. The mailing address for
both issuers is PO Box 2999, Hartford, CT
06104-2999. Variable life insurance products
discussed in this material are distributed by
Hartford Equity Sales Company, Inc. (HESCO), a
broker/dealer affiliate of The Hartford. You
should carefully consider the investment
objectives, risks, and charges and expenses of
any variable universal life insurance policy and
its underlying funds before investing. This and
other information can be found in the prospectus
for the variable universal life insurance policy,
the prospectuses for the underlying funds and
appropriate product information, which can be
obtained from your financial professional or by
logging on to www.hartfordinvestor.com. Please
read them carefully before you invest or send
money.
This information is written in connection with
the promotion or marketing of the matter(s)
addressed in this material. The information
cannot be used or relied upon for the purpose of
avoiding IRS penalties. These materials are not
intended to provide tax, accounting or legal
advice. As with all matters of a tax or legal
nature, you should consult your own tax or legal
counsel for advice. LIF 7558 PPT-04-354-12-07