KUGLER SYSTEM THE 1 Every Day Applications for IRC Section 1035 Transfers of Life Insurance The Advisors Forum July 16, 2008 Teleconference Presented by Frank L. Rainaldi, CLU, ChFC, DAEP and William A. Conway, J.D.

KUGLER SYSTEM THE 2 SECONDARY NO-LAPSE GUARANTEE OF THE DEATH BENEFIT (SHADOW ACCOUNT GUARANTEE) Age 60 Age 120 $500,000 No-lapse Premium $10,000 Age 60 Age 120 There is no lapse, even if zero cash value, and premium does not cover policy charges. Account Value from illustration (not guaranteed) Guaranteed Shadow Account Value May Be Higher or Lower Than Policy Account Value

KUGLER SYSTEM THE 3 Year Premium $10,000 10,000 Death Benefit $500, ,000 $3,000 25,000 57, ,000 0 No-Lapse Guarantee Illustration (Account Based Guarantee) Non-Guaranteed Account Value (Age 40) Guaranteed No Lapse Guaranteed Shadow Account Positive Value Value Not Provided Via Illustration Positive Value Guaranteed

KUGLER SYSTEM THE 4 Tax-Free Exchange Via IRC Section 1035 Mr. Kugler’s Old Policy $500,000 Face Amount 150,000 Cash Value 100,000 Cost Basis Mr. Kugler’s Old Policy $500,000 Face Amount 150,000 Cash Value 100,000 Cost Basis Mr. Kugler’s New Policy $750,000 Face Amount 150,000 Cash Transfer 100,000 Cost Basis Mr. Kugler’s New Policy $750,000 Face Amount 150,000 Cash Transfer 100,000 Cost Basis TAX FREE EXCHANGE UNDER IRC SECTION 1035

KUGLER SYSTEM THE 5 RESTRUCTURING P0LICY LOANS PRIOR TO AN IRC SECTION 1035 EXCHANGE Existing Policies $500,000Face Amount$600, ,000Cash Value 150,000 50,000Loan 100,000 75,000Cost Basis 75,000

KUGLER SYSTEM THE 6 Revised Policies (after restructuring of loan) $500,000Face Amount$600, ,000Cash Value 150,000 75,000Loan 75,000 Cost Basis 75,000 Proposed Arrangement

KUGLER SYSTEM THE 7 Revised Policies (after termination of loan) $425,000Face Amount$525,000 50,000Cash Value 75,000 0Loan 0 0Cost Basis 0 Results and Benefits

KUGLER SYSTEM THE 8 Tax-Free Exchange via IRC Section 1035 Transfer Mr. Kugler’s Two Existing $950,000 Face Amount 125,000 Cash Value 0 Loan 0 Cost Basis Mr. Kugler’s Two Existing $950,000 Face Amount 125,000 Cash Value 0 Loan 0 Cost Basis Mr. Kugler’s New Policy $1,250,000 Face Amount 125,000 Cash Transfer 0 Loan 0 Cost Basis Mr. Kugler’s New Policy $1,250,000 Face Amount 125,000 Cash Transfer 0 Loan 0 Cost Basis

IRC SECTION 72 (e)IRC SECTION 1031 Cash Value Before Loan$150,000 Loan Amount 100,000 Remaining Cash Value$50,000 Partial Surrender$100,000 Cost Basis (100,000)Lesser of: Built-In Gain50,000 Taxable Gain (Boot)$10,000$50,000* Computing the Taxable Gain When There is a Partial Surrender on a Policy with a Built In Gain Shortly Before or Shortly After the Section 1035 Exchange TAX ASPECTS OF A PARTIAL SURRENDER ON A SECTION 1035 EXCHANGE WITH A BUILT-IN GAIN TO EXTINGUISH A POLICY LOAN 9

KUGLER SYSTEM THE 10 Account Value $1,000,000 Age 70 M&F Age 50 Pure Life Insurance Existing Policy Planned Premium $255,000 Shadow Account Value $1,000,000 Age 120 M&F Age 70 Pure Life Insurance No-Lapse Guarantee Policy No-Lapse Premium $0 $180,000 No Premium Required$9,250 EXCHANGE OF AN OLDER FLEXIBLE PREMIUM POLICY FOR A SECONARY NO-LAPSE PREMIUM POLICY

KUGLER SYSTEM THE 11 REVIEW OF LIFE INSURANCE POLICY DESIGN AND AMOUNT TO DETERMINE IF THEY ARE CONSISTENT WITH THE ESTATE OWNER’S CURRENT ESTATE OBJECTIVES Planned Premium $9,250 Pure Life Insurance $1,000,000 M&F Age 95 M&F Age 50 Age 70 Current Year $250,000 Account Value Existing Policy

KUGLER SYSTEM THE 12 Shadow Account Value M&F Age 70 Age 120 No-Lapse Guarantee Policy Pure Life Insurance $1,500,000 $145,000 No-Lapse Premium $9,250 (Plus $250,000 Rollover) New Policy

KUGLER SYSTEM THE 13 A SECTION 1035 EXCHANGE OF AN ORDINARY LIFE POLICY WITH AN ADDITIONAL INSURANCE RIDER Cash Value of Additions Age 55 Age 100 Additional Insurance Rider Premium $5,500 $1,000,000 Pure Life Insurance Portion of Paid-Up Additions One Year Term Insurance Guaranteed Cash Values Base Policy Premium $13,500 Pure Life Ins. Protection (Amount at Risk) $500,000 Age 70 Premium Outlay $19,000 per Year Existing Policy Ordinary Whole Life Policy with Additional Insurance Rider $285,000

KUGLER SYSTEM THE 14 Shadow Account Value Age 70 Age 120 Pure Life Insurance $1,000,000 $215,000 Paid-Up Guarantee No-Lapse Premium $6,000 New Policy with $285,000 Rollover and a Secondary Death Benefit Guarantee

KUGLER SYSTEM THE 15 IMPLEMENTING AN IRC SECTION 1035 TRANSFER ON A SURVIVORSHIP LIFE POLICY AFTER THE FIRST SPOUSE HAS DIED At Mr. K’s Death Mr. and Mrs. K Ages 60 and 56 $1,000,000 Survivorship Life Policy Owned by ILIT Mr. and Mrs. K Ages 60 and 56 $1,000,000 Survivorship Life Policy Owned by ILIT Mrs. K Age 70 $1,000,000 Single Life Policy Owned by ILIT Mrs. K Age 70 $1,000,000 Single Life Policy Owned by ILIT Existing Premium $12,000 At Mr. Kugler’s Death the Survivorship Life Policy Becomes a Single Life Policy

KUGLER SYSTEM THE 16 IRC 1035 Exchange $220,000 Cash Value Rollover Mrs. K Age 70 $1,000,000 Existing Policy Owned by ILIT Mrs. K Age 70 $1,000,000 Existing Policy Owned by ILIT Mrs. K $1,000,000 New Single Life Policy Owned by ILIT Mrs. K $1,000,000 New Single Life Policy Owned by ILIT No-Lapse Premium $5,500 Exchanging the Existing Policy for a New Single Life Policy Qualifies as a “Like Kind” Exchange Under IRC Section 1035

KUGLER SYSTEM THE 17 A SECTION 1035 TRANSFER OF A NON-PARTICIPATING WHOLE LIFE POLICY TO A POLICY WITH A SECONDARY DEATH BENEFIT GUARANTEE Age 50 Pure Life Insurance Age 65 Age 120 $460,000 Guaranteed Cash Value $1,000,000 No Premium Payments Required Existing Paid-Up Non-Participating Whole Life Policy

KUGLER SYSTEM THE 18 Shadow Account $1,500,000 Age 120 Age 65 No Premium Payments Required New $1,400,000 Policy with $465,000 Rollover and No Required Premium to Guarantee the Death Benefit Pure Life Insurance $365,000

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