Principal® Select Reward Plan

Date

Name and title

Business Owner & Executive Solutions – For Growing Businesses

Financial Needs

• Retirement funds – Do I have enough?• Healthcare – How will I pay for it when I retire?• Survivor needs – What if I die too soon? • Will I have financial security?• Taxes?

Popular Selective Retirement Income (Executive Benefit) Plans

• Deferred Compensation– Executive defers salary therefore

deferring income tax until benefit is paid

– Corporation books a liability– Ultimate control/Golden handcuffs– Can be informally financed with a

corporate-owned asset– Employer contributions/match are

made with after-tax dollars– Provides deferred tax-deduction for

employer– IRC Section 409A compliance

required– Plan-level administrative service fees

• Principal Executive Bonus PlusSM – Executive owns the asset– Company gets a current tax

deduction for employer contributions

– Executive pays income tax on employer contributions

– Distributions are tax-advantaged if life insurance is used to finance the benefit

– Limited Employer control/ Golden handcuffs

– No cost for administration

Deferred Compensation Plans – Reality Check

Employer Challenges

• S corporation/LLC

– Not available for owners

• Deferred tax deduction

• Cost of administration

• Accounting

– Balancing assets and liabilities

Executive Challenges

• Security of the promise

• Who owns the asset?

• What happens to the benefit at death?

Executive Bonus Plans –Reality Check

1. Employer – Control– Restrictive Agreement– Repayment Obligation

2. Executive – Current Taxation– Contribution is taxed although, executive

may receive a tax bonus from the employer

Principal Select Reward Plan

• Financial protection in the event of a premature death

• Financial security to help ensure you don’t outlive your income

Self-Completing Solution

Principal Select Reward Plan How it Works

Employer and executive enter into two agreements1. Endorsement Split Dollar

• Executive is allowed to name a beneficiary for the death benefit of a life insurance policy

2. Principal Select Reward Plan (Unfunded/Unvested)• Employer promises to pay a lump-sum bonus to the

executive within 30 days of the executive meeting a specified service requirement

Self-Completing Solution

Principal Select Reward Plan - How it Works

When the executive vests in the benefit (fulfills the service requirement)– Ownership of the life insurance policy

• Transfers to the executive – Executive owns the policy free and clear

• Pays income tax from policy values • Receives income-tax free income at retirement• Income-tax free death benefit to survivors at death

Self-Completing Solution

Employer pays premium for policy

Executive is endorseda death benefit

Principal Select Reward Plan During the Service Period

EMPLOYER EXECUTIVE

#1

Principal Select Reward Plan During the Service Period

Executive pays tax on economic benefit

EXECUTIVE

#2

Principal Select Reward Plan During the Service Period

The Select Reward Plan agreement creates an unfunded SERP-type

Benefit for the Executive

The Select Reward Plan agreement creates an unfunded

SERP-type benefit for the executive

UnfundedSERP

#3

Executive owns policy and can take income from policy

Principal Select Reward Plan at Distribution

Corporate-owned life policyownership is transferred to the executive to satisfy the

promised bonus

Executive pays tax on the amount of the bonus/value of policy

EXECUTIVESERP benefit/Life insurance

policy

Executive ownsLife Policy withcash value &death benefit

#4 #5

Principal Select Reward Plan

FOR EMPLOYER• Flexibility with both

selection and financing options

• Golden handcuff• Minimal IRC Section

409A compliance• Free administration!

FOR EXECUTIVE• Survivor death benefit

during service period• Minimal tax cost

during service period for death benefit

• Lump-sum bonus when vested

• Retirement income

Free Plan-Level Administrative Services

Plan-level Administrative Services

• Dedicated home office administrator• Provide economic benefit amount to employer• Consolidated plan-level

reports• Employer-view Internet

access• Tax-value reporting upon the transfer of the

policy to the executive

The Tailored Edge You Need

Our Business Owner and Executive Solutions offer you the complete package –

the expertise to help you find the right solutions, a portfolio of products to choose from, and the plan administrative services you need to focus on your business, and

leave the details to us.

Disclosures

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter

covered and is provided with the understanding that The Principal is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal

Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products from the Principal Financial Group® (The Principal®) are issued by and plan administrative services are provided by Principal National Life Insurance Company (except in New York) and Principal Life Insurance Company. Securities offered through Princor Financial Services

Corporation, 800/247-1737, member SIPC. Principal National, Principal Life and Princor® are members of the Principal Financial Group, Des Moines, IA 50392.

No part of this presentation may be reproduced or used in any form or by any means, electronic or mechanical, including photocopying or recording, or by any information storage and retrieval system,

without prior written permission from the Principal Financial Group.

Copyright ©2008 Principal Financial Services, Inc.

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