Due Diligence in Selecting & Understanding Life Insurance Policies Quad Cities Estate Planning Council Due Diligence in Selecting & Understanding Life Insurance Policies Presented by Michael W. Halloran, AEP, CLU, ChFC, CFP®

Establishing the Need for Coverage

Need Temporary need – term insurance Permanent – Continuing need

Term Coverage Annual Renewable 10-20-30-Year Level Renewable Convertible Waiver of Premium

Permanent or Continuing Need Whole Life Participating Portfolio New Money Universal Life No guarantees Secondary guarantees Mortality Table Company Financial Ratings Guarantees and Problems Purpose of Cash Variable Life Mortality and Expense Cost Variable Universal Life Investment Risk Indexed Universal Life Guarantees Indexes Participation Rate Cap Zero Cost Loans

Traditional Whole Life Insurance $1,000 Benefit At Risk Let’s review how ULSG is different from whole life and universal life’s original design. We all know how pure whole life works. There’s a fixed premium. It provides a guaranteed death benefit and cash value. By age 100, the cash value equals the insurance amount. Lifetime coverage is provided. Cash Value $0 50 Age 100

Traditional Universal Life Insurance $1,000 Benefit At Risk Lapse With traditional universal life, premiums are flexible. Policy charges are deducted from the cash value. If too little premium is paid, the policy charges can exhaust the cash value. The policy could then lapse. Cash Value $0 50 Age 100 Results may vary by carrier

Universal Life w/Secondary Guarantee Insurance $1,000 Benefit With universal life with secondary guarantees, even if the cash value becomes zero, the policy will not lapse if the stipulated no-lapse premium has been paid or the “shadow account” is positive and other rules have been followed. The stipulated premium and shadow account are ULSG policy designs. The shadow account design is the most common. The shadow account is a company benchmark. It is calculated the same way as the cash value, but with more aggressive assumptions. It is referred to as a shadow account because the policyholder has no access to it. The no lapse premiums for either ULSG design often appear to be too good to be true. They can be significantly below the non-guaranteed premiums for blended whole life policies or the current non-guaranteed premium to maintain coverage on a regular universal life policy. At Risk Cash Value $0 50 Age 100+ Results may vary by carrier

Equity Indexed Universal Life Insurance $1,000 Benefit At Risk Lapse With traditional universal life, premiums are flexible. Policy charges are deducted from the cash value. If too little premium is paid, the policy charges can exhaust the cash value. The policy could then lapse. Cash Value $0 50 Age 100 Results may vary by carrier

Amount of Coverage Estate Business Charitable

Understanding the Policy Illustration Pro forma Product Illustration NAIC Illustration Product enhancements (non-guaranteed) Current experience Past history Current scale vs. portfolio method Third party references

Professional Liability and Disclosure Who are you liable to? Policyowner Insured Beneficiaries What happens if your recommendations are wrong? How can you limit your liability?

Rates Mortality Expenses charges Interest Investing long Investing short

Rating Agencies Standard & Poor’s Moody’s Fitch A.M. Best

Standard & Poor’s Moody’s Fitch A.M. Best www. standardandpoors.com Moody’s www.moodys.com Fitch www.fitchratings.com A.M. Best www.ambest.com Superior AAA 7 AAApi 0 Exceptional Aaa 5 Highest AAA 8 A++ 16 A+ 64 Excellent AA+ 10 AA 16 AApi 4 AA- 44 Aa1 3 Aa2 6 Aa3 23 Very High AA+ 8 AA 14 AA- 17 A 67 A- 34 Good A+ 25 A 16 Api 15 A- 12 A1 26 A2 21 A3 13 High A+ 23 A 21 A- 9 Very Good B++ 5 B+ 6 Adequate BBB+ 4 BBB 0 BBBpi 3 BBB- 1 Baa1 0 Baa2 0 Baa3 0 BBB+ 1 BBB 0 BBB- 1 Vulnerable/Fair B 2 B- 1 Vulnerable BB+ to R 7 Not Rated 62 Weak Ba1 to C 3 Not Rated 122 Non-investment grade BB+ to CCC- 3 Not Rated 107 C++ to F 1 Not Rated 24