PRINT -- Chapter 1
Introduction to Nonqualified Plans

The important points addressed in this lesson are:

The name "nonqualified plan" may suggest to the financial practitioner and to the business owner that it is somehow not as good as a "qualified plan"; nothing could be further from the truth

A nonqualified plan is good or bad only insofar as it accomplishes or fails to accomplish the business objective

Nonqualified plans enable businesses to tailor plans around the needs of the business and its key executives

Nonqualified plans may permit the business to recover some or all of the costs of providing the plan benefits

Unlike contributions to qualified plans, contributions to nonqualified plans are not income tax deductible

Nonqualified plans are generally most attractive to businesses in which owners play a part in the day-to-day management

Business needs that may be met through a nonqualified plan include attracting, retaining and rewarding key executives

Salary continuation plans are often referred to as "golden handcuffs" because of their ability to retain key executives

A qualified plan is one that, by meeting certain non-discrimination and other requirements, qualifies for a tax deduction for contributions

The major types of nonqualified plans are split dollar, deferred compensation, executive bonus and group carve out plans

Deferred compensation plans fall into two categories: true deferral plans and salary continuation plans

A split dollar plan is one in which a person with financial resources helps another person with a need to purchase life insurance

An executive bonus plan is the simplest of nonqualified plans and is one under which an employer agrees to pay premiums on a life insurance policy owned by an executive

In a group carve out plan, an employer replaces group life insurance in excess of $50,000 with individual universal life insurance policies and pays a premium equal to the premium for the replaced excess group life insurance

The most effective method of marketing nonqualified plans is through target marketing

Target marketing involves the identification and selection of markets for penetration that meet certain criteria and are appropriate for the agent


To the uninitiated, a nonqualified plan seems clearly inferior to a qualified plan.  After all, if it were as good as a qualified plan, wouldn't it also be "qualified"?  Perhaps one of the first things that should be done in order to give nonqualified plans the respect which they are due and their rightful place in employee benefit planning is to change their name to something else¼almost anything else.  

 The question about whether a qualified plan is superior to a nonqualified plan is as inane as the question about how much life insurance an individual should have.  To both questions the answer is the same: it depends.  In the case of employee benefit plans, the right answer to the question depends upon what the business is trying to accomplish through its plan.  In many cases, the business should consider a qualified plan; in many other cases, however, a nonqualified plan may be the only reasonable choice.  

This course will examine the four principal nonqualified benefit plans, and it will discuss how they work to accomplish the business owner's objectives.  As you read the material that follows, it is important to remember that a nonqualified plan is good or bad only insofar as it furthers  -- - or fails to further -- the business owner's objectives in establishing it.  



The Nature of Nonqualified Plans

It is convenient to think of a nonqualified plan simply as one that offers specific -- and, often, important -- benefits to a business and its employees in ways that are prohibited in a qualified plan.  As a result of the nonqualified plan's providing of those particular benefits, it does not meet one or more of the requirements of a qualified plan.  For those reasons, it becomes a nonqualified plan.  

The plus side of nonqualified plans is that they enable the business and its owners to tailor benefits around the needs of the business and its key employees.  That means the employer can favor one employee over another by offering a benefit to one that it withholds from the other.  Or, the employer may offer both employees the same type of benefit but give one a larger benefit than the other.  Furthermore, the business -- depending on the type of nonqualified plan -- may be able to recover some or all of its costs to provide the benefit.

There is a negative side to nonqualified plans, however.  That negative side results from the fact that these plans are not qualified plans.  Since they are not qualified plans, the employer forgoes any income tax deduction resulting from its making a contribution to the plan.  (We will see, later in our discussion, that the employer does enjoy an income tax deduction for its payment of funds to an executive bonus plan.  That deduction, however, is a deduction for compensation paid rather than as a contribution to a nonqualified plan.)

The lack of an income tax deduction for a nonqualified plan contribution should not be allowed to loom inordinately large in the business owner's mind.  While a current tax deduction would appeal to virtually all business owners, the alternative may be for the business to recover some or all of its costs for the plan.  That alternative may be far more attractive once the business owner understands it.



Meeting the Needs of Business Organizations

Although there are certainly some businesses that provide employee benefits because they feel their employees are entitled to them, there are many more businesses that install employee benefits because they feel they must do so in order to compete for talented employees.  While these latter firms may be giants, this feeling, i.e. that particular benefits must be provided in order to compete, is highly characteristic of closely held corporations and other business forms in which the owners take an active part in the day-to-day management of the business.  It is to these businesses that nonqualified plans are most attractive.

The needs of businesses that are met through nonqualified plans generally fall into the following categories:

The ability to attract key talent
The ability to retain identified key executives
The ability to reward high-impact achievers, and
The need to maximize the beneficial impact of allocated employee benefit expenditures

Let's look at just what each of these needs involves.


Attracting Key Talent

It is not unusual in many industries for a few extremely talented individuals to gain industry-wide recognition for their talents and ability to produce meaningful business results.  Although these individuals may be CEOs, it is more likely that they hold other senior management or professional positions.  Attracting them to fill key spots in the organization can be very challenging, especially if the organization's pockets are not as deep as those in other industry firms.

Let's consider a real-life -- if hypothetical -- example.  IBM, because of its enormous capitalization and outstanding reputation, probably wouldn't have much difficulty luring a talented executive away from a much smaller competitor if it chose to do so.  It would be able to sweeten the pot until the executive agreed to join it.  One of the incentives that it could offer is a special salary continuation plan that pays the executive an income at retirement in addition to the organization's pension and profit sharing plans.  Regardless of the final offer that it made to the executive, IBM's likelihood of success is high.

Turn the example around, however, and we can begin to see more clearly the importance of nonqualified plans.  Suppose Dot.Coms `R Us, a small high tech company, is trying to lure an IBM executive away from Big Blue.  Not unlike many start-up companies, Dot.Coms `R Us offers enormous potential if it is successful.  What it doesn't usually offer are the following:

Fringe benefits similar to those of a large company, and
Stability

The principal reason for its more modest fringe benefits is economic.  In a word, the cost for such benefits for all employees may be substantial.  However, by using a nonqualified plan, Dot.Coms `R Us could tailor-make a fringe benefit plan solely for the executive that it is trying to attract.  Furthermore, it can shield those benefits from its creditors.  (This protection from creditors will adversely affect the tax treatment of the plan, but it will guarantee that the benefits are available if the employer were to fail.)  While the availability of a nonqualified plan won't guarantee that Dot.Coms `R Us will attract the executive, it can help to make up for the benefits he or she would give up by leaving the industry giant.


Retaining Key Executives

Just as these nonqualified plans can be used to help attract key talent from other firms in the industry, they can also be employed to help ensure that the key executive is motivated to remain with his or her present employer.  Although any special benefit provided to a key executive may be sufficient to retain him or her, one nonqualified plan -- a salary continuation plan -- performs this function so well that it is often referred to as the "golden handcuffs."

One of the important nonqualified plans -- the one that we will examine in chapter 2 -- is called generically a nonqualified deferred compensation plan.  In fact, a nonqualified deferred compensation plan may involve an actual deferral of income by the executive (a true deferred compensation plan) or not (a salary continuation plan).  

Normally, a firm that is interested in ensuring that a key executive remain with the company will install a salary continuation plan for him or her.  Under the terms of this plan, the executive may receive a continuation of some portion of salary for 10, 15 or more years beyond retirement along with any regular pension benefit.  However, if the executive were to leave the firm's employ before retirement, he or she would forfeit all of the salary continuation benefits.

Consider the impact that this kind of a plan might have on a key executive.  Suppose that Jim Clark is an executive at Dot.Coms `R Us and he is earning $200,000 annually.  He has a salary continuation plan under which Dot.Coms `R Us will pay him 50 percent of his salary for 10 years if he stays with the firm until retirement.  If he leaves the firm before that time, he will lose all of those benefits.  Even if Jim never received another increase in salary, his salary continuation plan will pay him a total of $1 million in the 10 years after he retires.  If he leaves Dot.Coms `R Us before retirement, the entire $1 million is lost to him.   At the very least, Jim will think long and hard about what he would lose before he left to work for someone else.


Rewarding High-Impact Achievers

Current income is the primary method of rewarding executives in Western society.  Although the employer must pay the high-impact executive a salary that he or she considers appropriate for the job being performed, current income has certain limitations.

Current income's first limitation is its diminishing ability to motivate.  If the executive is currently earning $80,000, an additional $50,000 in salary may be quite motivating.  It is likely that the executive will both grateful and highly motivated -- at least for a period of time.  However, if the executive is already earning $500,000, an additional $50,000 in salary is considerably less motivating.  Furthermore, the motivation level of even our first executive who is now earning $130,000 will probably wane before too long, particularly if the employee's next raise is less than $50,000.

The second limitation of current income is caused by our progressive income tax structure.  The top federal income tax rate is 35 percent.  All but 9 states levy a tax on earned income, and their top bracket, on average, is about 7 percent.  These two income taxes produce a composite marginal income tax bracket of about 40 percent (remember, the state tax is a deduction against federal income).  As a result, a $20,000 raise to an executive in the top income tax bracket amounts to only about $12,000; $8,000 is lost in income taxes.  That additional income must also be invested and, at an 8 percent annual taxable return, will net about 4.8 percent after taxes.  

Consider how much better the executive would fare if his or her employer took the $20,000 raise and deferred it in a nonqualified deferred compensation plan.  The entire $20,000 would be invested by the employer (rather than $12,000 after taxes), and the earnings on the investment would not be taxed to the executive until the funds were received.   


Maximizing the Impact of Employee Benefit Expenditures
Everybody wants to get more "bang" for his buck.  That sentiment applies to the money spent for employee benefits just as surely as it applies to other things.  The question, of course, is how to get that increased impact.

A true story may illustrate.  Some years ago a major eastern mutual life insurance company sought ways to provide increased motivation to its field force -- not an uncommon objective.  One strategy followed another, and each was introduced with more fanfare than its predecessor.  Unfortunately, none of these strategies produced the desired result -- that is until a sales campaign was mounted that offered agents an opportunity to win a green blazer bearing a distinctive crest.  The results were gratifying as one agent after another met the qualifying sales benchmark.  

The competition for these green blazers was intense.  One of its more interesting aspects was the identity of those agents that qualified.  For virtually all of the winners, the economic value of the blazer was insignificant.  These were people in the top 1 percent of earners and could easily afford to purchase the blazer if it were available.  Furthermore, the highly visible crest on the pocket meant that the blazer was probably inappropriate for use at many social occasions.  What the blazer did, however, was to set these individuals apart from their colleagues; by virtue of being awarded the blazer, they became a select group.  Nonqualified plans offer the same kind of setting apart and may provide similar motivation to achieve.

Identifying a key executive and establishing a nonqualified plan for him or her makes a statement about the executive's value to the firm.  Although other employees would probably be unaware of the nonqualified plan, the message is not lost on the executive.  The selectivity offered by nonqualified plans generally enables the employer to gain maximum motivational impact from its benefit dollars.



Comparing Nonqualified Plans and Qualified Plans

At the outset, when comparing nonqualified and qualified plans, it is important to understand that one type of plan is not inherently superior to another.  Both have their place in the business client's employee benefits, and their suitability is determined principally by the client's situation and objectives.  Having said that, let's begin by considering the principal characteristics of qualified plans.

We can begin by identifying the principal qualified retirement plans.  Qualified retirement plans fall into two general categories:

Defined contribution plans, and
Defined benefit plans

A defined contribution qualified plan is a qualified plan characterized by individual accounts.  Under these plans, contributions are typically made to the plan by the employer and may or may not include contributions from the participating employee.  

The benefit that the participant receives depends on the contributions made to the individual's account and any added forfeitures, the investment performance of the account assets and any expenses allocated to it.  Normally, at the employee's retirement he or she may take a lump-sum distribution or receive periodic payments.  Under these plans, the employer does not guarantee a particular benefit.

Plans that fall under the rubric defined contribution plans include all of the following:

·Money purchase pension plans
·Thrift plans
· ESOPs
 · Target benefit plans  
 · 401(k) plans
 · SEPs
· Profit sharing plans
· Stock bonus plans
· SIMPLEs

Defined benefit plans take an approach that can be seen as diametrically opposed to defined contribution plans.  Specifically, while defined contribution plans are couched in terms of the contribution to be made, defined benefit plans are couched in terms of the benefit to be provided.  

Defined benefit plans are characterized by all of the following:

Plan formulas are geared to benefits rather than contributions
The annual contribution from year to year must normally be determined actuarially
Forfeitures reduce the employer's subsequent contributions rather than increase the participants' benefits

For the most part, we can identify a defined benefit qualified plan as any qualified retirement plan that is not a defined contribution plan.

We noted earlier that a qualified plan is simply one that meets certain requirements and, thereby, qualifies for a current income tax deduction for contributions made to it.  It is important that the extent of the requirements not be minimized.  Although there are many other qualified plan requirements, the requirements that a qualified plan must meet -- and which are particularly important in a comparison with a nonqualified plan -- include the following:

The plan must satisfy minimum coverage requirements, and, if it is a defined benefit plan, it must satisfy minimum participation requirements.
Plan contributions or benefits may not discriminate in favor of highly compensated employees, and
The plan must meet certain vesting, i.e. nonforfeitability, requirements.


Minimum Coverage and Participation in Qualified Plans

A qualified plan's minimum coverage and participation requirements, while not requiring that every employee be included, must ensure that a minimum percentage of a company's workforce be included in the plan.  In contrast, a nonqualified plan is generally one specifically designed for a single key executive or -- in some cases -- for a specific group of key executives.

By requiring that a minimum percentage of the workforce be included in the plan, a qualified plan could not operate to provide a benefit to one individual in a workforce of many employees.


Non-discrimination in Qualified Plans

A plan must meet certain non-discrimination requirements in order to be a qualified plan.  One of those important requirements is that neither its benefits nor its contributions may discriminate in favor of highly compensated employees.  

Discrimination -- when that term is used in common parlance -- has been damned largely because of the unequal treatment it causes.  When that discrimination is based on inappropriate criteria, it should be condemned.  However, employers discriminate all the time in terms of salary, position and perquisites.  The difference in permissible discrimination is that it is based on performance.  As a result, the best performers generally receive the largest salaries, the highest positions in the organization and the most sought -- after perks.

In the design of a nonqualified plan for a key executive, the employer legitimately wants to discriminate in favor of that particular executive who would probably be considered a highly compensated employee.  Since a qualified plan may not discriminate in favor of highly compensated employees, it is clearly an inappropriate vehicle for delivering this kind of benefit.


Vesting Requirements in Qualified Plans  

One of the hallmarks of qualified plans is the requirement that, at some point, benefits must be nonforfeitable.  In other words, they must vest in the plan participant.  In general, qualified plan benefits must vest at least as quickly as under one of the following two regimes:

5-year "cliff" vesting, or
7-year graded vesting

Under the 5-year cliff vesting regime, no vesting is required to take place until the participant has 5 years of service with the employer.  Under the 7-year graded vesting regime, benefits must vest at least 20 percent after 3 years of service and vest an additional 20 percent each year thereafter until they are 100 percent vested after 7 years.  The alternative minimum vesting schedules are as shown below:


Minimum Vesting Schedules
Years Of Service
5-Year Cliff Vesting
7-Year Graded Vesting

 1
0%
 0%
2
0%
0%
3
0%
20%
4
0%
40%
5
100%
60%
6
80%
7 or more
100%

These two minimum qualified plan vesting schedules are accelerated to 3-year cliff vesting and 6-year graded vesting for employer matching contributions and for qualified plans that are considered top heavy.  Of course, an employer may vest benefits faster than shown on either of these minimum schedules.

In a nonqualified plan, the employer may want to retain key executives by making it expensive for them to terminate their employment.  Normally, this is accomplished by making the plan benefits forfeitable in the event of the executive's voluntary termination.  This aspect of salary continuation type deferred compensation plans causes them to be known as the "golden handcuffs."  Obviously, the forfeiture of benefits resulting from an executive's voluntary termination at any time prior to retirement would not be permitted in a qualified plan.

We have discussed the selectivity and lack of qualified plan requirements applicable to nonqualified plans.  There are two other significant differences between qualified plans and nonqualified plans that need explanation:

Income tax treatment, and
Cost recovery.

The most visible difference between qualified plans and nonqualified plans -- and the difference to which business owners are often the most sensitive -- is the income tax treatment of contributions to the plan.  Qualified plans enable business owners to currently deduct contributions made to them; in contrast, nonqualified plan contributions are not deductible.  

The second difference between qualified plans and nonqualified plans is often not fully appreciated by clients.  That difference is cost recovery.  In many nonqualified plans, an employer may be able to recover its costs for the entire plan and, as a result, have no long-term cost.  Qualified plans have no provision for cost recovery by the employer.



Important Types of Nonqualified Plans

There are four major nonqualified plans that differ from each other principally in terms of their benefit emphasis.  Certain plans emphasize death benefits while others emphasize retirement income; some plans enable an employer to recover its costs while others enable the employer to take a current income tax deduction (generally as compensation rather than as a plan contribution).  

The major nonqualified plans are:

Deferred compensation plans
Split dollar plans
Executive bonus plans, and
Group carve out plans

Let's take a brief look at each of them before examining them in detail later in this course.


Deferred Compensation

Nonqualified deferred compensation plans can be further classified as:

True deferred compensation plans (salary reduction plans), or
Salary continuation plans

The principal difference between these two deferred compensation plan types lies in whose money is used to provide the benefit.  In the case of a true deferred compensation plan, the executive actually delays the receipt of income.  Often, but not always, the income whose receipt is delayed is a raise or a bonus.  In the case of a salary continuation plan, the executive gives up no current income.  Instead, the salary continuation plan is funded solely by the employer.  

There are certain other differences between these two types of deferred compensation plans.  The other differences, however, result from the difference in payers.

Split Dollar

Split dollar plans may be used in virtually any situation in which a person with cash is interested in assisting a person with a life insurance need to purchase the needed life insurance.  A concerned father, for example, may want to assist his daughter's husband to purchase needed life insurance; in such a case, the resulting split dollar plan is known as private split dollar.  

In the majority of cases, however, split dollar plans are used in an employee-employer situation, wherein an employer may pay some or all of the premiums on a permanent life insurance policy under which the employee is the insured and which provides the bulk of the death benefit to the employee's personal beneficiary.  If the employee were to die during the life of the split dollar plan, the employer's interest could be limited to a recovery of its aggregate premiums.  It is on the use of split dollar in the employee-employer relationship that the balance of our split-dollar discussion will be focused.

A split dollar plan, when used in an employee-employer situation, is an arrangement under which a permanent life insurance policy is purchased on the life of a key executive, and the premiums and death benefits are split between the employer and the executive (or a third party).  The policy may be owned by the executive or by the employer, and the policy's ownership has a significant impact on the tax treatment given to the plan.


Executive Bonus Plans

Executive bonus plans are the simplest of nonqualified plans by far.  Under an insured executive bonus plan, an employer agrees to pay some or all of the premiums on a life insurance policy owned by an executive.  The employer's premium payments are deductible to the employer as compensation paid to an employee.  As a result, the premium payments are included in the executive's W-2 statement, and the executive must include the premiums in his or her income for tax purposes.


Group Carve Out Plans

A group carve out plan is an arrangement under which an employer replaces the executives' group life insurance in excess of $50,000 with individual universal life insurance policies.  These individual universal life insurance policies are owned by the respective executives.

The value of group life insurance in excess of $50,000 is taxable to the group participant.  By the employer's eliminating all of the group life insurance over this tax-free amount, the participant avoids the imputed income resulting from the excess group life insurance.  The employer then takes the premium that it would have paid for the replaced excess group life insurance and uses it to make payment on the participant-owned universal life insurance policies that replaced the group life insurance.

As we can see in the hypothetical before and after group carve out shown in the chart below, the total death benefits need not change as a result of the group carve out plan.  The only change -- and that may be fairly significant -- is the change from all group term life insurance to part group term life insurance and part universal life insurance.

Hypothetical Group Carve Out
Death Benefits Before Group Carve Out
Death Benefits After Group Carve Out
 Group life insurance death benefit
     $        250,000
     $            50,000
 +  Universal life insurance death benefit
                          0
                  200,000
 Total death benefit
     $        250,000
     $           250,000




Effectively Marketing Nonqualified Plans

The most effective marketing of nonqualified plans takes place in a target marketing environment.  Through target marketing of nonqualified plans, a life insurance agent focuses his or her attention and marketing efforts on groups of business owners that:

He or she wants to work with and are appropriate for the agent
The agent can contact easily
Share certain common characteristics
Communicate with one another through meetings, written communication, etc., and
Have financial needs that are generally shared by most of the group

We will take a few minutes to look at the general principles involved in effective target marketing, beginning with how to find a niche.


Finding Your Niche

A life insurance agent that has been in the insurance business for any length of time has usually found prospects and clients with whom he or she has a great deal of rapport.  These are people whose company the agent may have thoroughly enjoyed in addition to having made a sale.  

Unfortunately, there are other prospects and clients with whom the agent may have had little in common.  Often, whether or not these individuals purchased a policy, the experience has been far less enjoyable.  In the process of target marketing, the agent tries to find groups containing large numbers of the former and few, if any, of the latter.

If an agent has previously worked with businesses and business owners, the place to begin is by looking through his or her client list.  The immediate task is to identify those current clients that are either business owners or senior executives in business firms.  

Once these business-related clients have been identified, the next job is to separate them into groups of individuals with whom the agent enjoyed working and those with whom he or she did not.  The purpose in so doing may be obvious: business owners and executives in the same industry often seem to have similar temperaments and outlooks.  An agent who has enjoyed working with one building contractor, for example, may enjoy working with other building contractors.

At the conclusion of this exercise, the agent may have identified a half-dozen or more clients that could be characterized as business-related and with whom the agent enjoyed working.  The next step is to telephone them for an appointment to discuss the possibility of specializing in the needs of others like them.  It is at this point that the agent begins to identify markets in which he or she can work profitably and effectively.


Identifying Markets

The process of identifying markets is an important step in the job of target marketing, but it is only the first of several important steps.  In this step, the agent is generally doing little more than gathering the names of those markets that have some cohesive element within them.  That cohesive element is often an association to which the bulk of the industry firms belong.

It is important when gathering the names of potential markets for the agent to suspend, to some extent, his or her critical faculty.  In simpler terms, don't try to eliminate markets before knowing enough about them to make an informed decision.

In addition to reviewing the list of current clients to identify potential markets, there are many resources that may be helpful in their identification:

The Yellow Pages of the local telephone book may have a category listed as Associations; as we will see later, an association that serves the market that has been identified by an agent as a worthwhile target can be of enormous help in breaking into the market.

The local newspaper's Business section may have a column devoted to local business happenings; these columns frequently report on the activities of important business segments in the area.

The Internet is a marvelous source of information concerning organizations in the agent's local area.  Simply by entering into a search engine the name of the state in which the agent is working along with the word "associations," the agent may obtain listings for as few as 20 or 30 or as many as several hundred associations.  For example, if the agent is working in New Jersey, he or she should access a search engine, such as Yahoo! or Google and search for "New Jersey associations."

The local Chamber of Commerce is another good source of information about local associations, and the Chamber's economic development officer may have a great deal of information that the agent can use when researching the selected markets.

The local library may have a listing of local or statewide associations along with the name of the executive director and a telephone number at which he or she may be contacted.  Another important resource for associations is Gale's Encyclopedia of Associations.

These are just a few of the resources that can be accessed to identify potential markets.  Normally, when the agent has identified 5 or more markets that he or she thinks should be considered, the next step in the process begins: researching.


Researching Identified Markets
Up to this point, all that has been accomplished is the identification of markets that may be appropriate for the agent.  Now the work really begins; the agent must research the identified markets.  Since salespeople tend to be more action-oriented than research-oriented, it is this area that often seems to cause them the most difficulty and is the step that agents frequently try to avoid or minimize.  That may be a costly mistake.

After the agent has identified potential markets, the job of researching them normally begins with locating one or more key players in the market to interview.  In addition to the current clients that the agent identified at the outset, some of the key players that the agent may want to interview include:

The executive director of the association that serves the market
Board members of the association that serves the market
The owner or president of one of the larger businesses in the market, and
The economic development officer at the local Chamber of Commerce office

The principal purpose of researching the initially-identified markets is to enable the agent to decide if the market is one to which he or she can bring value and enjoy a profitable insurance practice.  There are other reasons to research the markets, of course.  These interviews provide the agent with information that will enable him or her to create an effective plan to develop the market in the event that it is selected.

To this end, the agent should conduct a number of interviews with selected "movers and shakers" in the market.  These interviews are very structured and generally look at the market from 6 perspectives:

Whether there is a good fit between the market and the agent; in this regard, the agent needs to consider his or her products, experience, interests and strengths.

Whether the size of the market is appropriate for the agent; in this case, the agent needs to find a market that is large enough to justify the expenditure of resources to develop but not so large that he or she will be "lost" within it.

Whether the market is already inundated with other agents working in it; with respect to the market's ability to support an additional agent, the agent must candidly assess his or her knowledge and abilities and compare them with those of other agents that are working in the market.  Assuming that the agent's skills and knowledge are sufficient, a rule of thumb that may be useful is that approximately 200 market members will generally support one agent.  Therefore, a market of 400 members is likely to support 2 agents, but probably not any more than that.

Whether the market's values are consistent with the agent's insurance products; in this regard, the agent will need to determine if the market members are likely to respond favorably to the agent and to what he or she offers.

Whether the market has a strong potential for profit; in doing this, the agent will want to determine if the businesses are earning profits and expanding or just holding on and trying not to lose money.

Whether the agent can reach the market members; generally, this criterion is affected by whether the market is served by a newsletter or magazine and whether it has periodic meetings and social events.

After several fact-finding interviews have been held with members of each market that the agent is considering, the agent needs to summarize the information obtained in the meetings and, based on that information, evaluate the market.

It can't be stressed enough that researching the initially-identified markets is critical.  If the agent can't reach the market members or if the market is in decline, the resources that the agent expends to develop the market -- and market development will consume substantial resources -- will be wasted.  How much better it is to realize that a market is wrong before having allocated resources to develop it than after.

Once the agent has selected one or two appropriate markets that he or she wants to penetrate, the target marketing process moves to its next step: market development.  Because of the time and financial commitment required to develop markets sufficiently, agents should generally avoid attempting to work in more than two markets simultaneously.  If the markets chosen are appropriate for the agent and the agent has adequately developed them, two markets should be sufficient to keep the agent busy almost all the time.  


Market Development

Market development encompasses all of those activities that enable an agent to create visibility and become well-known as a resource to the market.  However, before beginning to engage in those activities, the agent needs to create a market development plan.  

The market development plan serves several purposes:

It identifies those activities in which the agent plans to engage in order to create visibility among the market members and those activities that will help to position him or her as a knowledgeable resource available to them.

It schedules when the identified activities are to begin and the anticipated results.

It estimates and budgets the costs associated with each of the planned market development strategies.

It is important to always bear in mind that the market development activities should be focused on accomplishing two important objectives:

Creating visibility for the agent, and
Positioning the agent as a knowledgeable and valuable resource that is available to the members

Depending on the nature of the market, one of the most important first steps is for the agent to join the association that serves the market in which he or she wants to work.  Often, the agent's opportunity to engage in many of the other market development activities will depend on becoming a member.  In addition, by joining the association, the agent usually receives a roster of all of the association members.

Not all associations are willing to permit an agent -- or anyone else without certain specified credentials -- to join.  That is something that the agent will normally learn at the time he or she is researching the market and should play a part in the agent's determining whether or not the market is one that is likely to be fruitful.  Many associations are not only willing to let an agent join, however; they enthusiastically encourage it.  Frequently, these associations have a vendor member status that will give the agent all of the membership rights and privileges other than the right to vote on issues before the membership.

Although annual membership dues vary from very modest to expensive, it is not unusual for association membership to cost $400 - $500 each year.  Membership dues, however, are not the only costs the agent is likely to incur.  Many associations have monthly dinner meetings -- often at local restaurants -- that may begin with a social hour, followed by dinner and then a business meeting.  These dinner meetings often cost $40 - $50 but provide an opportunity for the agent to have dinner in a relaxed setting with the members of his or her market.    

The market development activities in which the agent should consider engaging include the following:

Activities that Create Visibility:
Activities that Position as a Resource:
 · Join the association
 ·2Put on programs that inform the members
· Attend association meetings
· Write articles on nonqualified plans for the association magazine  
· Sponsor association events, e.g. golf tournaments, etc.
· Send newsletters to the members
· Serve on association committees
· Create and send a personal brochure
· Be an exhibitor in market trade shows
· Publish a hypothetical nonqualified plans case
· Create an advisory board comprised of market members
· Put on a concept seminar

Creating the visibility that the agent needs and positioning him or her as a resource to the market members takes time and money.  If the agent lacks sufficient time or financial resources to adequately develop his or her chosen market, it makes more sense to rely on the normal non-target marketing sales techniques until the resources become available.  In other words, it is poor strategy to make a half-hearted attempt to target market.  It is likely to be both expensive and non-productive.


Summary

Nonqualified plans -- unlike qualified plans -- enable a business to tailor a plan to meet the specific needs of both the business and its executives.  Although premiums paid for life insurance policies used to fund nonqualified plans are not tax deductible, nonqualified plans may give a business an extraordinary opportunity: the opportunity to recover its costs for plan benefits.  

Although nonqualified plans are employed in many Fortune 500 companies, they often find their greatest application in smaller, closely-held corporations and other businesses in which the owners participate in the firm's day-to-day management.  Some of the important business objectives that are furthered by these nonqualified plans include attracting, retaining and rewarding key executives.  The major types of nonqualified plans are split dollar, deferred compensation, executive bonus and group carve out plans.  

In contrast to a simple life insurance sale, the installation of a nonqualified plan in a business is more complicated.  For that reason, there is considerable need for the agent to have positioned him- or herself as an expert in nonqualified plans.  The most effective method of gaining a reputation as a knowledgeable resource is through the market development techniques used in target marketing.