Product: What's Hot & What’s Not Michael J. Sapyta, CFP®, CLU® - VP, Advanced Planning

Topics to cover VP Survey Results on Index Universal Life Index Universal Life in a Post AG49 World Winning Business with Guaranteed Variable Older Age Term – Save the Sale Post Tax Act Die too Soon, Live too Long, Get Sick Along the Way

Survey of Highland VPs Would you like to sell more Indexed Universal Life in 2018?

Index Universal Life in a Post AG 49 World The New Illustration War

AG49 Provide guidelines for consistency with illustrated rates Limit spread of participating loans to 1%, and Require additional disclosures i.e. Mid-Point Ledger Over 10,000 data points in the AG49 BIA calc

Post AG49 Illustration Landscape A renewed illustration gamification amongst carriers to circumvent AG49 requirements has led to…. More complicated products and features Increased loads / charges to increase performance Proliferation of Persistency Bonuses Amount Timing Duration

Which brings us where? Due to AG49, carriers stated illustrated rates have decreased due to changes in the back testing….however… Carriers are now putting less into the base index strategy and more into bonuses and multipliers

The New Generation of Index UL Products AG49 was successful…ish Average illustrated rates are down – GOOD Participating Loan Spreads reduced, for the most part – GOOD Mid-Point Ledger Included – GOOD More Confusing and Less Transparent Products – BAD Multipliers (Guaranteed & Non-Guaranteed) Persistency Bonuses Extra Charges to Increase Caps Inconsistency applying performance bonuses w/participating loans BAD for Agents, Customers and the Industry….breeds distrust 2-Carriers have loan spreads of about 2%

The New Generation of Index UL Products Products with a Multiplier present unique issues for agents illustrating Index Universal Life Why… Multipliers are NOT included in the AG49 calculation Who does this impact the most? Agents who think their being conservative by illustrating “lower rates”

Product Enhancement Features

Multiplier Example 6% 1.10 6.6% Indexed Rate Earned (and Illustrated Rate to which AG49 Applies) Multiplier Factor (Applied in Excess of Cap) Effective Rate Earned (Reflected in Illustration)

Multiplier Example 6% 1.15 6.9% Indexed Rate Earned (and Illustrated Rate to which AG49 Applies) Multiplier Factor (Applied in Excess of Cap) Effective Rate Earned (Reflected in Illustration)

5.25% 1.15 6.04% 6.00% 1.00 Multiplier Example Indexed Rate Earned Multiplier Factor (Applied in Excess of Cap) Effective Rate Earned (Reflected in Illustration) 6.00% 1.00 Indexed Rate Earned Multiplier Factor (Applied in Excess of Cap) Effective Rate Earned

Multiplier Example at AG49 6.90% 1.00 Indexed Rate 12% Cap / 0% Floor Multiplier Factor (Applied in Excess of Cap) Effective Rate Earned 6.00% 1.15 6.90% Indexed Rate 10% Cap / 0% Floor Multiplier Factor (Applied in Excess of Cap) Effective Rate Earned

Multiplier Example at AG49 Now….there is something to be said about having a multiplier instead of a higher cap, you’re able to change the shape the return profile of the policy in that the returns should slot between a High Par and a High Cap product These two strategies cost about the same to manufacture! However one is being positioned as more conservative / sustainable etc.

Given all of that…..we need to talk about this guy!

Pacific Life’s PDX Dynamic Pricing If you’re a fan, I understand why….the potential here is immense and there is a hedging aspect the way the index strategies work which is not fully appreciated or understood. If you’re not a fan, I understand that as well….the product is very expensive. We’re going to walk through how this works, and hopefully demystify the PF so that you can help your clients make informed buying decissions Indexed Universal Life in a Post AG49 World

Pacific Life PDX

PDX - Multiplier Example 6% 2.00 12% Indexed Rate Earned Multiplier Factor (Applied in Excess of Cap) Effective Rate Earned 10.25% 2.00 20.50% Indexed Rate Earned Multiplier Factor (Applied in Excess of Cap) Effective Rate Earned

PDX - Multiplier Example “Well that’s just silly. No carrier will ever credit 20% to an Index UL product!” - SKO Attendee

Performance Factor in Action – Level 6% Return PF added to all strategies

Performance Factor in Action – Level 6% Return 4% Options Budget used in the example

Performance Factor in Action – Level 6% Return

Performance Factor in Action – Level 6% Return

Performance Factor in Action Ok so, you pay a lot for this feature which is non- guaranteed, opaque and dynamic? YES! And its also a “Trust Me” from the carrier! Also YES!

Performance Factor in Action The greater the Numerator (Charges) relative to the Denominator (Accumulation Value X Cost of the Options) the Larger the Performance Factor (PF) Multiple…..Dynamic!

Performance Factor in Action

PDX - Multiplier Example “What’s he even talking about? A carrier wouldn’t design a product that gives the client more money after he takes a distribution or has a few down years!” - SKO Attendee

Performance Factor In Action Impact of the PF when the Accumulation Value is lower than anticipated…Instead of a Level 6.00% return lets assume an extreme example of… Years Return Assumption 1 – 10 6.00% 11 – 15 0.00% 16 – Lifetime The S&P has never had 5 Zeros in row… However it will drive home the point

Performance Factor in Action – Variable Return

Performance Factor in Action – Variable Return

Performance Factor in Action – Variable Return

Performance Factor in Action – Variable Return

Performance Factor in Action – Variable Return

Performance Factor in Action – Variable Return

Performance Factor in Action – Variable Return

Performance Factor in Action – Variable Return

Performance Factor in Action The PF acts as a counter weight to down years in the underlying index and when taking withdrawals, helping to amplify and catch-up the account value Who is this strategy for? Clients and advisors who understand how IUL works and believe in the strategy long-term…PDX is the Doubling Down on IUL theory

Trust me …..

Trust me …..

Taking the Cap Off annexus® & Minnesota Life Indexed Universal Life in a Post AG49 World

Lets Take the Cap Off!

Lets Take the Cap Off!

Lets Take the Cap Off! That’s a 2.78% difference

Lets Take the Cap Off!

Lets Take the Cap Off!

Lets Take the Cap Off!

Lets Take the Cap Off!

Lets Take the Cap Off AG49 How does AG49 treat an Uncapped strategy vs. a strategy with a cap? BAS = 7.13% AG Rate (12.5% Cap / 0% Floor)

Save A Sale Post TC&JA Older Age Term

Buying Objection Client (C): “With the new exemption level I no longer have an Estate Tax issue. Good day” Advisor (A): “But it’s a good investment, it’s a non- correlated asset class with guaranteed features” C: “I said good day Sir” We’re going to see this and some of you likely have already!

Buying Objection Client (C): “With the new exemption level I no longer have an Estate Tax issue. Good day” Advisor (A): “Yes, that is true, if you intend to leave this earth before the end of 2025 when the exemption levels are halved to about $6.5 Million” C: “Say what?” A: “You heard me. How about we talk about locking in your insurability today?”

Older Age Term Most current policies are not convertible after age 75 or at most 5 years in some cases At the end of the term period, premiums generally rise to 10x the original premium For clients age 70+, in 10 years, you are beyond the conversion period and have no options to extend coverage How can you recover “lost value”?

Mr. 73 – Standard Non-Smoker

Mr. 75 – Standard Non-Smoker

Die Too Soon Live Too Long Get Sick Along the Way

This is wonderful solution to bring to your RIAs / CFP advisors who are building Financial Plans and designing retirement income plans and scoring those plans

Winning Business with Guaranteed Variable

$10 Million 2nd to Die Survivorship IUL vs. SVUL ONE Competitor: Penn Mutual SIUL with Lifetime Guarantees Highland: Lincoln SVUL ONE Assumptions: Male & Female – 55 – Preferred Non-Smoker $500,000 1035 Exchange Value 10-Pay Premium Solve

$10 Million 2nd to Die Survivorship IUL vs. SVUL ONE Penn Mutual: $125,700 Premium Cost Lincoln: $128,904 Premium Cost

$10 Million 2nd to Die Survivorship IUL vs. SVUL ONE Penn Mutual: $125,700 Premium Cost Lincoln: $128,904 Premium Cost Penn Mutual has an 11% Cap and a 2% Floor – Nice! Lincoln provides access to sub-accounts, including S&P

$10 Million 2nd to Die Survivorship IUL vs. SVUL ONE Penn Mutual has an AG49 Default Rate of 7.13%

$10 Million 2nd to Die Survivorship IUL vs. SVUL ONE Ok so the IUL Translate Rate is 10.40%! The product does not need to achieve these rates to be cheaper than SVUL ONE but….What if they did achieve this return?

$10 Million 2nd to Die Survivorship IUL vs. SVUL ONE Lets reduce the funding into the Lincoln SVUL ONE plan so that the Guaranteed Death Benefit extends out to the clients Joint LE of age 92

Age 92 Guaranteed Death Benefit for Lincoln SVUL ONE

$10 Million 2nd to Die Survivorship IUL vs. SVUL ONE Lets reduce the funding into the Lincoln SVUL ONE plan so that the Guaranteed Death Benefit extends out to the clients Joint LE of age 92 Save $21,700 a year for 10 years $217,000 in Total Premium Savings At 6.00% Coverage extends to Age 102 At 6.80% Coverage extends to Lifetime

“Are you going to the Donnelly or Dooley session next?” “Is he still talking?” “Who is this again?” “Are you going to the Donnelly or Dooley session next?” - SKO Attendee

Questions? Thank you!