The document discusses the function and benefits of captive insurance companies as a means of protecting and transferring wealth. Captive insurance allows businesses, particularly those with uninsured risks, to manage their insurance needs while providing tax advantages and financial planning tools. It emphasizes the importance of professional guidance before forming a captive insurance entity to navigate legal and regulatory considerations.

1. Protecting & Transferring Wealth With A Captive Insurance Company Presented By: Michael E. Wright, CFP Wright Financial Advisors, LLC Registered Representative of and securities offered through OneAmerica Securities, Inc., Advisor.9229 Delegates Row #190, Indianapolis, IN 46240,(317)573-3838, Member FINRA, SIPC, a Registered Investment Advisor. Insurance Representative of American United Life Insurance Company, AUL and other insurance companies. Wright Financial Advisors is not an affiliate of OneAmerica Securities or AUL and is not a Broker/Dealer or Registered Investment Advisor. Share Holder Meeting August 31, 2010

2. The Matter in this presentation is designed to provide accurate information with regards to the subject matter covered and is not rendering legal, accounting, or tax advice. For answers to specific questions and before making any decisions, please consult a qualified attorney, tax advisor or other professional to address your specific needs.

3. Risks To Wealth Uninsurable Business Risks Personal Lawsuits Income Taxes Wealth Transfer Taxes

4. What is a Captive? Definition: A captive insurance company is a special purpose corporation or subsidiary implemented to underwrite the risks of the parent, sponsor, or sister company. • It is recognized as an insurance company for regulatory purposes • It is recognized as an insurance company for reinsurance purposes. • Domiciled either offshore or onshore where permitted by law. • It represents the most aggressive, formalized and flexible form of self-insurance.

5. Small Captive Insurance Benefits Lower Insurance Costs Deduct $1.2 mil premium or reserves Reserves Build Income Tax-Free Ordinary income to Premium Prem.–Op Costs -Claims= Net Inc @C.G. Rate Increased Asset Protection Transfer Net Prem. Inc. to heirs=$1.2yr-cost

6. Captive Insurance Caveats Must be a legitimate business- NO Tax-Shelters Long-term business Beware of Excessive Life Insurance Promo’s Adequate Consistent Cash Flow Consider the True P&C over 831(b) Specialty Tax and Insurance Pro Advice

7. Case Study Bill owns ABC Co., which has uninsured risks, that his current property and casualty insurance company will not insure. Bill creates D Co., a Captive corporation, which is an insurance company, covering ABC Co.'s uninsured risks. The stock of D Co. is owned by Bill's children. Now for the fun part: suppose the insurance premium for the uninsured risks are determined by a consulting actuary to be $500,000 per year. ABC Co. pays the $500,000 premium to D Co. The entire premium is immediately deductible by ABC Co. like any other PCI. Under the Captive rules, all of the $500,000 is income-tax free to D Co. ABC Co. is in a 40% tax bracket, state and federal combined. ABC Co. is only out of pocket $300,000 ($500,000 less $200,000 in tax savings). D Co. has the entire $500,000 to invest. But remember, D Co. is a Captive and must hold the $500,000, plus earnings, as a fund to pay potential claims for the risks it insures. ABC Co. pays premiums to the Captive to insure for litigation defense, professional liability and contract fulfillment . Remember with a commercial insurance company, if the insured has no losses, the CIC keeps the entire premium — no refunds. Even though a Captive cannot reduce (actuarially determined) premiums, a financial windfall results (unused reserve) if the insured's actual losses are less than actuarially predicted. For example, suppose Bill's Captive (D Co.) has an unused reserve. A portion of the unused reserve can be refunded to ABC Co., reduce future premiums or be paid to the Captive's shareholders (Bill's children) as a dividend.

8. Reasons for Captive Formation Unavailability of Coverage – Captive provides its owners the opportunity to fund for losses which may not be available through conventional insurance Litigation Defense Professional Liability Construction Defect Warranty of Work Product (Short Term and Long Term) Retained Amounts in deductibles Coinsurance Percentage funding Supplier Disruption Event Disruption Contract Completion • Conventional insurance industry is not meeting the needs of their clients • May Provide a Tax Favored Funding Mechanism • Captive offers an overall financial facility to smooth variability in earnings as a result of contingent events Ability to provide insurance coverage through policy wording that may be not be commercially available due to restrictions imposed by regulatory authorities – Ability to produce an insurance policy with your own wording and to cover risks which the conventional market finds unacceptable

9. Reasons for Captive Formation Financial Planning Tool – Captive owned by: Family members Key executives Golden Handcuffs Deferred Compensation

10. Accounting for Insurance • Insured View – Risk is transferred from the insured by the payment of premium – Premium is an expense when paid, even though the claim may not be paid for years to come, if at all – Client may accrue for retained risk in a deductible, SIR, Coinsurance or uninsured situation. Accruals reduce earnings but are not a tax deductible expense until there is a payment for a loss.

11. Accounting for Insurance Captive treatment – The captive uses insurance company accounting rules as long as: The captive qualifies as an insurer There is risk transfer There is risk distribution – Subsidiary provides advantageous accounting treatment for losses that may not be available in other solutions

12. “ Micro” Economics 21,000,000 21,000,000 15,500,000 10,500,000 5,400,000 1,100,000 Net To Heirs 0 0 0 0 0 0 Less: Transfer Taxes @ 50% 21,000,000 21,000,000 15,500,000 10,500,000 5,400,000 1,100,000 Captive Value 2,000,000 500,000 500,000 500,000 500,000 100,000 Less: Operating 1,000,000 0 500,000 0 500,000 Less: Claims 24,000,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 Less: Premium Deduction 24,000,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 Income Captive 7,200,000 7,200,000 5,400,000 3,600,000 1,800,000 360,000 Net To Heirs 7,200,000 5,400,000 3,600,000 1,800,000 360,000 Less:Transfer Taxes @ 50% 14,400,000 14,400,000 10,800,000 7,200,000 3,600,000 720000 Retained Value 480,000 480,000 480,000 480,000 480,000 Less: Income Tax @ 40% 24,000,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 Taxable Income 0 0 0 0 0 Less:Premium Deduction 24,000,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 Income Totals 20 15 10 5 1 No Captive

13. “ Macro” Economics Supersized Wealth Transfer *100,000 funding for 10 yrs, Aviva Accumulator 3 UL, 55, M, NS, Std Underwriting 26,986,000 26,986,000 21,486,000 16,486,000 11,386,000 7,086,000 Net To Heirs 5,986,000 5,986,000 5,986,000 5,986,000 5,986,000 5,986,000 Life Insurance Proceeds At Death* 0 0 0 0 0 0 Less: Transfer Taxes @ 50% 21,000,000 21,000,000 15,500,000 10,500,000 5,400,000 1,100,000 Captive Value 2,000,000 500,000 500,000 500,000 500,000 100,000 Less: Operating 1,000,000 0 500,000 0 500,000 Less: Claims 0 0 0 0 0 Less:Income Tax @ 40% 0 0 0 0 0 Taxable Income 24,000,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 Less: Premium Deduction 24,000,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 Income Totals 20 15 10 5 1 Captive- SuperSized Transfer Plan

14. Most Likely to Benefit • Privately Held Company • $25 Million in revenues • $500,000 in existing P&C Premium • At least $1.5 million in Net Income Before Taxes • Uninsured Risks/Self-insured Risks

15. “ Good Fit” Industries • Agricultural Groups • Restaurants and Hotels • Professional Service Firms • Manufacturers • Subcontractors • General Contractors • Automobile Dealers • Transportation and related businesses • Wholesale Distributors

16. Common Risks to Insure • Policy Exclusions • Deductible Amounts • Construction Defects • Product Liability • Product Recall • Product Warranty • Employment Practices • Wrongful Acts • Reputational/brand/loss of income risks • Litigation defense • Contract Completion

17. Our Services • Key areas of Consulting: Estate And Wealth Transfer Planning Life Insurance Design and Implementation Assist in Selection and Coordination of Third Party Manager who provides: – Feasibility Analysis, Program Initiation, Education, and Goal Setting – Captive Conceptual Design Development – Pro Forma Modeling – Domicile Analysis; Business Plan and Models – Vendor Analysis; – RFP preparation – Tax and Legal Opinion Coordination Implementation and Follow Through Registered Representative of and securities offered through OneAmerica Securities, Inc., Member FINRA, SIPC, a Registered Investment Advisor. Insurance Representative of American United Life Insurance Company, AUL and other insurance companies. Wright Financial Advisors is not an affiliate of OneAmerica Securities or AUL and is not a Broker/Dealer or Registered Investment Advisor.