Business Planning

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The Successful Business OwnerStrategies for effective business planning

The information provided is not written or intended as tax or legal advice and maynot be relied on for purposes of avoiding any Federal tax penalties. MassMutual,its employees and representatives are not authorized to give tax or legal advice.Individuals are encouraged to seek advice from their own tax or legal counsel.Individuals involved in the estate planning process should work with an estateplanning team, including their own personal legal or tax counsel.

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Ask yourself these important questions…• What is the plan for my business when I retire?

• Is my business capable of continuing its success in the event of my or my partner’s untimely death or disability?

• Is my family adequately protected if something were to happen to me?

• Have I done everything I can to attract, retain and reward the key employees that are critical to my business?

If you answered “no” to any of these questions, you may want to consider implementing a formalbusiness planning strategy. Proper planning can help you protect your business, attract and retain keyemployees, and ensure that your business transfers in the manner that you choose.

Life insurance is often a key component to an effective business planning strategy because lifeinsurance provides valuable protection for business owners, their families, and their employees. Here’s how:

• It can be used to enhance the standard benefits package for key employees to encourage loyalty to your company.

• It can help you protect your business financially in the event that one of your key employees dies.

• It can help ensure the proper transfer of the business in the event something unforeseen happensto you or a business partner.

This brochure covers the many ways life insurance can help protect the longevity of your business andthe people who are key to its success.

You know what it takes to build a successful business. It takes vision, preparedness, skills

and desire – not to mention a focused dedication to achieving your goals. If you are like most

business owners, you’ve worked hard and made many sacrifices to grow your business.

That’s why you should put just as much energy into protecting it as you did building it.

Attract & Retain KeyEmployeesIn today’s highly competitive executivemarketplace, it is becoming increasingly moredifficult to attract and retain top talent. Salary isno longer the only compensation driver. Theseastute individuals also look at an employer’soverall benefits package and its potential to helpaddress their real concerns of financiallyprotecting their families in addition to adequatelyplanning for retirement. These concerns areheightened by ever-changing tax laws, pensionplan uncertainties, and Social Security shortfalls.The good news is you can offer benefits that canmake a difference for both your executives andyour business.

You probably already have a standard benefitspackage in place – one that includes medical anddental coverage, disability income insurance, anda retirement plan. However, your competitors morethan likely offer a similar benefits package. Thesedays, employees are looking for special benefitplans above and beyond the standard packagesmost employers already offer. These benefits oftenprovide the primary incentive for key employees tojoin and remain loyal to your company.

The following describes some incentive benefitplans that you can offer to your key employees.What they all have in common is their ability toattract and retain key people. In addition, they mayeven be of benefit to the most important person inthe business – you!

Nonqualified DeferredCompensation Plans (NQDC)NQDC plans are designed to provide extraretirement benefits for key employees above andbeyond what can be provided with qualifiedpension, profit sharing, or 401(k) plans. You canchoose which employees are to be covered, theamount of benefit to be provided, and whether thebenefit is subject to a vesting schedule. In fact,you can use this type of plan just like it is used bylarge, publicly-owned corporations – to rewardand attract employees with “golden handcuffs.”

NQDC plans are ideally suited to employers that:

• Want to provide additional retirement incometo select, highly compensated employees.

• Have a stable, mature corporation that is likely to be in existence to pay the retirement and/or death benefit as promised by the NQDC.

• Have key employees who have maxed outtheir qualified retirement plans.

These plans can be, and often are, supported bylife insurance that is paid for and owned by thebusiness. Life insurance is a safe way to provideincome to key employees and their families. Theliving benefits from the accumulated cash valuecan be an effective way to fund retirement incomefor the employee, while the death benefit can bepaid to the employee’s family when the individualdies. In addition, the plan can be structured so thatyou recover the premiums you paid into the policy(requires a higher death benefit amount).

The retirement benefit or death benefit is taxdeductible to the company when paid out andtaxable to the employee or his or her familywhen paid out as a salary continuationretirement benefit.

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Split Dollar PlansSplit Dollar plans are a cost- and tax-effectivemethod of providing multiple benefits using lifeinsurance. Split Dollar gets its name because itinvolves splitting the premium payments andpolicy benefits of a life insurance policy betweenyou and your key employee. Here’s how ittypically works:

• You pay the premiums

• There are two types of ownership:

� Endorsements: You are the purchaserand owner of the policy and there is anagreement between you and the insuredemployee that defines the employee’srights to the policy.

� Collateral Assignments: Your employeepurchases the policy and is the owner ofthe policy. The employee then makes acollateral assignment of the policy to youin return for you paying all or part of thepolicy premiums.*

• You are entitled to all of the policy’s cash value

• When the employee dies, you can recoupthe premiums you paid into the policy orreceive an amount equal to the total cashvalue that’s accumulated in the policy,whichever is greater.

• The balance of the death benefit is paid to the employee’s beneficiary

A split dollar plan is tax effective for theemployee. Instead of paying full premiums withafter tax dollars, the employee’s annual cost islimited to a taxable economic benefit based onthe employee’s share of the death benefit. Inaddition, the death proceeds received by theemployee’s beneficiary are income tax free.

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*Cash value is a feature of permanent life insurance.

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Executive (162) Bonus PlansAn Executive, or 162, Bonus Plan is a type ofincentive plan where the business provides anexecutive with funds that are used to purchase alife insurance policy owned by the employee. Yourbusiness pays the life insurance premium directlyor indirectly through a salary bonus. You canchoose which employees receive this incentive, butthe employee has full access to the policy’s cashvalue and he/she chooses the beneficiary.

Executive Bonus Plans are recommended when:

• A key employee has a need for life insurance.

• You are looking for additional tax deductions.

• You need to provide key employees with a benefit in addition to a qualifiedretirement plan.

The bonus amount you pay is fully tax deductibleto the company, provided this is consideredreasonable compensation, and taxed as ordinaryincome to the employee. You have the option towork out an arrangement with the employee,such as offering a loan, to help cover the incometax liability.

Qualified Retirement Plansincluding 412(i)1

Depending on the size of your business and planobjectives, MassMutual offers products andservices for tax qualified retirement plans, such as401(k), profit sharing, and 412(i) plans. Specifically,a 412(i) plan is a qualified defined benefit pensionplan, funded exclusively with fixed annuities orwith a combination of fixed annuities and levelpremium permanent life insurance. A 412(i) planmay provide larger federal income tax deductionsthan other types of plans and are generally used bybusinesses where the owners are above age 50.

Additional InsuranceOptionsOftentimes, business owners overlook theopportunity to make other types of insuranceavailable to employees in packages along withlife insurance or the plans previously discussed.Disability Income Insurance, for example, can beanother important benefit. Nearly half of smallowners believe that the likelihood of anemployee becoming disabled is one in 50. Theactual likelihood, according to the AmericanCouncil of Life Insurers (ACLI), is one in three.2

1 412(i) has been renumbered 412(e)(3) by the Pension Protection

Act of 2006.

2 Source: American Council of Life Insurers (ACLI), 2003.

Long-term disability income insurance can have taxadvantages and can be made available to keyemployees only or to all employees. The employeewould own a disability income insurance policywith waiting and benefit periods suitable forhis/her own circumstances. You pay the premium,which may be tax deductible. Generally, thepremium is not taxable income to the employee;however, if disability should occur, the benefits arethen taxable to the employee. You can choose toallow the employee to include the premium as partof their reportable income, which would result in atax free disability benefit.

Protect the BusinessYou’ve Worked So HardTo BuildYou’ve built your business with the hopes that itwill withstand the test of time. Unfortunately thereare a lot of elements out of your control that canaffect the success of your business, such as anunstable economy, a lack of consumer spending,and increased competition.

Think about what would happen to your business ifyou, your business partner, or a key employee wereto die unexpectedly. There’s no doubt that thiswould also have a huge impact on your businessand its continued success. But there’s good news:this is something you can plan for.

The following are some common business planningstrategies designed to protect your business. Justas you would insure your business property, youshould also consider insuring the people who makethe biggest impact on your company’s success.

Key-Person InsuranceKey person insurance can help offer peace ofmind in knowing that the financial stability ofyour business is protected in the event of avalued employee’s untimely death. Basically, youpurchase a life insurance policy to cover the lifeof that individual, naming your business as thebeneficiary. If the key employee dies, the policyproceeds are paid back to the business to helpkeep it going while you seek to fill the void left by the deceased employee.3

This arrangement is ideally suited for businesses with:

• Owners, partners or executives that have a direct impact on company earnings.

• Salespeople who continually exceed goals orhave relationships with important clients.

• Individuals who have specialized skills or technical knowledge that cannot easily be replaced.

Premiums for key person insurance are not taxdeductible since the business is the beneficiary ofthe policy, and may be subject to Corporate AMT.However, the death benefit proceeds are typicallyexempt from federal income tax. It’s also importantto note that accurately assessing the key person’svalue to the business is critical to make certainadequate funds are available when they areneeded most.

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3 Death benefit may be subject to Alternative Minimum Tax (AMT).

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Buy-Sell AgreementsAs part owner of a business, one of your primaryconcerns should be to ensure the continuity of thebusiness should you or one of your partners dies.With a buy-sell agreement one party is obligated topurchase a deceased business owner’s interest inthe business at a certain price, and another party –the deceased owner’s estate or heirs – is obligatedto sell the interest at that price. By establishing abuy-sell agreement, you can help ensure a smoothtransition of ownership, with minimal disruption tothe day-to-day activities of the business.

An effective buy-sell agreement must establish:

• Who will purchase the decedent’s share ofthe business.

• At what price the decedent’s heirs or estatewill sell the share.

• When the sale will take place and how it will be funded.

There are two types of buy-sell agreements, bothutilizing life insurance. Under both types ofarrangements, the total amount of insuranceshould approximate the anticipated purchase priceof the insured’s share of the business.

In a Cross-Purchase Buy-Sell Plan eachbusiness owner purchases a life insurance policycovering the life of every other owner. Eachbusiness owner pays the premiums and is thebeneficiary of the policies that he/she ispurchasing. If an owner dies, the surviving ownersuse the life insurance death benefit to purchasethe deceased owner’s interest.

In an Entity/Stock Redemption Buy-Sell Planthe business purchases life insurance policies on each owner. The business pays the policypremiums and is the beneficiary on each policy. If one of the owner’s dies, the death benefit fromhis/her policy is paid to the business to purchasethat owner’s interest in the company.

The chart on the following page provides someguidance to help you determine which buy-sell plan may be most suitable for your business.

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FACTOR CONSIDERATION

Number of parties The larger the number of parties, the more complex theestablishment and administration of a cross-purchase plan will be.This would include a far greater number of insurance polices if thatwas the funding vehicle.

Age and ownershipdifferential

The greater the age difference, the larger the financial obligationimposed upon the younger/minority stockholder or partners, under across-purchase plan. An entity plan may be preferable since it allowsfor a pooling of the premium obligations within the business(corporate dollars).

Life insurance funding An entity purchase plan would not necessitate the business owners’personally paying premiums for funding life insurance. However, splitdollar life insurance may assist in funding a cross-purchase.

Cost basis Since a cross-purchase plan generally will result in the survivingowner receiving a higher cost basis for the business interest, thesurvivor would incur lower capital gain for any subsequent sale.

Attribution of ownership rules Due to potential dividend taxation under Internal Revenue CodeSection 301, redemption may be inadvisable for a family corporation.Therefore, a cross-purchase plan may be the only viable approach.

Possibility of plan change If the parties anticipate that they may change from one type of plan toanother, the effect of the transfer-for-value rule {Internal Revenue CodeSection 101 (a)(2)} favors the initial establishment of a cross-purchaseplan for a corporation, since the policies could later be transferred tothe corporation to fund a redemption without creating a transfer-for-value. However, the parties normally would not be able to transfer thepolicies from the corporation to the non-insured stockholders to fund across-purchase plan, without creating a transfer-for-value and,therefore, subjecting the death proceeds to income taxation.

Tax considerations Funding a stock redemption agreement requires attention to be paidto possible accumulated earning tax and the corporate alternativeminimum tax. A cross-purchase plan can ignore these concerns.

Tax bracket If the corporate tax bracket is higher than the policy-owner’sindividual tax bracket, a cross-purchase arrangement would be thelogical choice and vice-versa.

Factors in Determining the form of Corporate Buy-Sell Agreement

Protect Your Most Valuable AssetLife insurance is often the foundation of a sound business planning strategy. Most business owners findthat permanent insurance – including whole life, universal life and variable life – suits their needs best.That’s because it:

• Is structured to provide lifetime protection benefits

• Can be obtained on a low cost-to-earnings ratio

• Accumulates cash values that can be recordable assets for your business3

• Can provide some tax advantages in certain situations

It’s also important to keep in mind that your business is your second most valuable asset. The death benefitin a life insurance policy can also help ensure that your family’s financial well-being is protected in theevent you or your business can no longer provide the income you are accustomed to.

Whether you’ve just started thinking about an employee benefit and business continuation plan, or alreadyhave some strategies in place, Massachusetts Mutual Life Insurance Company (MassMutual) offers avariety of financial products and services to meet your particular needs. Talk to your MassMutual financialprofessional about designing a plan to help protect and ensure the continued success of your business.

After all, if it was a business worth building, then it’s a business worth keeping.

For over 150 years, MassMutual and its affiliated financial professionals have helped guide our policyholders toward greater security and financial freedom.

Our commitment is to help you focus on what you value most, clarify what you want to achieve in life, andunderstand how life’s uncertainties could impact your plans and aspirations. After all, it’s not about wherelife takes you…it’s about where you take life. Built on a foundation of integrity, strength, and reliability,MassMutual can help you get there.

One measure of a company’s value to its customers is its financial strength. MassMutual’s exceptionalfinancial strength is underscored by ratings that are among the best in any industry:

A.M. Best Company . . . . . . . . . . . . . . . . . A++ (Superior)

Moody’s Investors Service, Inc. . . . . . . Aa1 (Excellent)

Standard & Poor’s Corp. . . . . . . . . . . . . . AAA (Extremely Strong)

Fitch Ratings . . . . . . . . . . . . . . . . . . . . . . . AAA (Exceptionally Strong)

This information is current as of October 1, 2007. Ratings are subject to change. Ratings are for Massachusetts Mutual Life

Insurance Company, C.M. Life Insurance Company and MML Bay State Life Insurance Company.

MassMutual.

We’ll help you get there.

Massachusetts Mutual Life Insurance Companyand affiliates, Springfield, MA 01111-0001

www.massmutual.com

© 2008 Massachusetts Mutual Life Insurance Company. All rights reserved.

MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual)and its affiliated companies and sales representatives.

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Securities offered through registered representatives of MML InvestorsServices, Inc., 1295 State Street, Springfield, MA 01111.