Three things Every Advisor should know to avoid Life Insurance Landmines Presented by: Julie Prince, CLU Prince Financial Services Julie-prince.com Julie.prince@nm.com

Common Estate Planning Goals Achieved with Life Insurance Survivor income Estate Taxes Equalizing inheritances Second Marriages Special needs Charitable/legacy planning

Step 1: Time to buy...what do you do when clients ask? Start asking questions: Purpose: There may be multiple uses. How much insurance and why? Type of policy recommended and why. Need short term or long? Flexibility? Needs change? Ability to pay? Cash value? Access?

Step 1, Continued: Assumptions made? Improvements in mortality, expenses and interest rates? How’s their health? Tobacco, surgery, meds? HIPPA – beware of confidentiality. The following handout will be available on the EPC website.

Types of Life Insurance Term Insurance Protection for “term” of time. Benefits paid if insured dies while in force. Greater coverage with lower premium than cash value options. No cash value. Covering needs that are anticipated to disappear over time; ie. Mortgages, college education, business loan.

Types of Life Insurance Continued: Permanent Insurance In place for a lifetime as long as premiums are paid. Guaranteed premiums, coverage and cash value Cash value grows tax deferred. Cash value can be used for loans or collateral. Hybrid types - blend term with whole life; reduces premium relative to death benefit. Cash accumulates more slowly - lower premiums. At some point it’s possible to go “paid up.”

Types of Life Insurance Continued: Universal Life - Term insurance with a side fund; Most Common - no guaranteed premium or death benefit. Traditional Universal Life Variable Universal Life Equity Indexed Universal Life – tied to investment choices and markets Universal Life with Secondary Guarantees – Only UL policy than guarantees premium, death benefit and possibly paid up status, depending on the contract. Note: If a Trust in Washington State contains variable life, the Trustee bears the responsibility for investment risk.

How do you know what to use and when? Solutions are based on the client’s needs: How long will you need coverage; what’s the purpose? What is the client’s ability to pay premiums? How is their health? Do they already have life insurance in place? Do they have other applications pending? Will the purpose change? What role will insurability play? Consider insurability today versus into the future… needs changing versus going away. Cost in the future is dramatically higher due to age, risk of health changing.

What has happened to our clients’ insurance coverage and why are so many policies imploding or taking longer than projected for dividend interest to pay premiums?

Brief Life Insurance Industry History Interest Rates and their relationship to Cash Value Life Insurance - 1980’s/early 90’s – short term rates were higher than long term rates. Permanent Insurance crediting rates lower than short term money market rates. Universal Life was born; combined term with a side fund. Backed by short term investments. As interest rates declined, and mortality charges went up, additional premiums were needed to keep up with rising internal costs inside the policy.

Step 2: Ask for: Do you need a copy of the policy? If so, what for? Most recent policy statement from “owner.” Do you need a copy of the policy? If so, what for? Call the insurance company with the owner and ask for: If Term Insurance: Policy date How long the coverage lasts How long the premiums are guaranteed for Owner, payer and beneficiary. Is it “convertible” to any sort of coverage that will last longer than the term? If so, to what? Ie. Universal Life or Permanent? If so, will there be ANY health questions?

Step 2, Continued: Call the insurance company with the owner and ask for: If Permanent: Policy date Owner, payer and beneficiary What’s the premium? Is premium currently being paid? Is there a policy loan? Is there a surrender charge if the policy was surrendered? Is there a taxable gain if the policy was surrendered? What is the interest or dividend being used for? Please run an “In-force illustration” assuming current interest and 1% below current. If variable, run at 6% gross and 4% net, after investment expenses. Assume all premiums paid and another scenario no more premiums paid.

Step 2, Continued: Call the insurance company with the owner and ask for: If Universal Life of any kind: Policy date Owner, payer and beneficiary What’s the target premium and what’s been paid annually? Is premium currently being paid? Is there a policy loan? Is there a surrender charge if the policy was surrendered? Is there a taxable gain if the policy was surrendered? What is the interest or dividend being used for? Please run an “In-force illustration” assuming current interest and 1% below current. If variable, run at 6% gross and 4% gross. If Equity Indexed, get the contract! Very difficult to understand. Assume all premiums paid and another scenario no more premiums paid.

Trustee Liability: The following article will be posted on the EPC website for your reference. The ILIT Liability Minefield: Trustees’ and Counsels’ Risks By: Melvin A. Warshaw and David Neufeld Toronto September 2010

The following life insurance illustration will be posted on the EPC website for your reference. Example: Illustration at the time of sale. Interest accumulates - 6.2% . Appears premium paid for $9,500 per year to age 75 enough to age 78; note differences in the projected and guaranteed columns. Interest looks high enough to pay premiums from age 76 and beyond.

The following illustration will be posted on the EPC website for your reference. Continued; the rest of the story. Page 2 goes beyond age 78. Year 39, age 84, an annual premium of $61,300 is due for that one year. The next year it’s $89,350... And increases annually.

Moral of the Story... Run scenarios and test them out to age 100 and beyond. Many now are out to age 120 and beyond. Consider target premium if using traditional UL products. Approach with caution and ask many questions.

Step 3: Now you have the “in force illustrations” and the policy summary information from the insurance company. Review Purpose: Will the projected policy remain in force long enough? What are projected premiums? Same? Higher? Payable longer? If whole life, premiums probably same, however, may be paying for more years due to lower interest rates.

Step 3, Continued: If Universal Life (except Secondary Guarantees) Premiums are not guaranteed, Coverage not guaranteed, Additional premiums may be needed, If so, for how long? If UL with Secondary Guarantees” Premium is guaranteed, Must pay within dates in the contract, Minimal cash value, Maximizes death benefit to premiums paid, Can easily lose guarantees (read contract)! Various scenarios can be run with the insurance company to “stress test” coverage vs. premiums paid in.

Three UL Myths – Debunked When you think of Universal life insurance, do you think of the days of old when it was the new and improved, “cheaper” way to get coverage until death compared to permanent insurance policies? The truth is: UL can be a great addition to your planning box tool if structured properly.

True or False? Traditional whole life solutions will meet the majority of our clients’ needs. FALSE! The changes and updates to Universal Life policies can help bring more flexibility to your clients’ life insurance solutions and financial plans. For example, you can fund higher amounts of cash value inside universal life than whole life because the modified endowment limits are higher; if you want to warehouse cash reserves for a business or asset protection, universal life policies are a great way to save long term, safer dollars and protect them against market volatility.

True or False? UL is a shining light in the life insurance world when it comes to flexibility! TRUE! Most of the bad press UL has received resulted from a combination of underfunding and unrealistic interest rate assumptions. It was that combination, among other reasons, such as “vanishing premiums,” that gave UL a bad name. The bottom line: UL isn’t bad, underfunded UL is. And as we know, not all insurance companies are the same so the broker needs to structure the product to fit the need and purpose of the insurance; conservatively as if the insured can never qualify again for a new policy

True or False? “I’m better off going with a traditional life insurance product for my client because it’s a better deal.” FALSE! Traditional products offer certain guarantees that UL does not. However, UL products can be “participating” in the investment performance of the insurance company’s investment portfolio, mortality and overhead expense of the company. If you’re working with a mutual company or product structured properly with guarantees and low expenses, you can achieve excellent value for the premiums paid versus death benefit provided. The financial ratings of the carrier are important!

Universal Life can offer guarantees: Universal life with secondary guarantees – typically estate liquidity. Typically, the structure focuses on minimizing premiums while maximizing coverage Very important to pay within certain dates Read contract carefully-know what you are committing to!

Conclusion Understand what you need and the purpose. Match need with coverage available. Consider flexibility in what you are buying. Structure the policy(ies) carefully; read the contract and understand requirements. Stress test the policy; review “what if” scenarios and run several scenarios. Treat projections as the FIRST STEP in buying the insurance. Get in force illustrations every year-retest assumptions. Consider company track record and financial strength.

Thank you!