LIFE INSURANCE in an Uncertain Environment Will Your Life Insurance Policy Die Before Your Client?

2005 => 2006 => 2007 = 2008 ??? These are uncertain times. Will there be a Federal Estate Tax? Will there even be a Federal Income Tax, or will we see a “simplified tax” and or consumption tax? After years of low interest and low inflation, will there be a sharp rise in rates? Will inflation return? How will all these “moving parts” of the economy affect our client’s insurance?

Types of Insurance Policies Term Life Universal Life Variable Universal Life Whole Life

Term Life Annual Renewable Term Increasing premiums Level Death Benefit Level Premium Term Level premiums Level Death Benefit Guaranteed Period

Term Life cont. Return of Premium Term Level Premiums Conversion Age Paid Up Life Insurance Return of Premium (not taxable)

Universal Life Flexible Premium Adjustable Whole Life Level OR Increasing Death Benefit Flexible Premiums Non-Guaranteed Interest Assumptions Mortality Costs General Account Returns

Variable Universal Life Flexible Premium Adjustable Whole Life Level or Increasing Death Benefit Flexible Premiums Non-Guaranteed Interest Assumptions Mortality Costs Individual Account Returns

Whole Life Guaranteed Death Benefit Guaranteed Premium Guaranteed Cash Value Non-Guaranteed Dividends

“We Promise to Pay” Whole Life ONLY The Guarantees of Whole Life Premium Guarantees Death Benefit Guarantees Cash Accumulation Guarantees

“We Promise to Pay”…maybe UL changes everything More moving parts Computer generated illustrations Smoke and mirrors? Projections – Guarantees or Guesses Shifting of mortality risk Shifting of investment risk

“Fat vs Skinny” The benefits of target premiums The dangers of minimum premiums

Vanishing Premiums Just wishful thinking? Can they re-appear? Additional Premiums required Same premium for more years More premium for same years Death Benefit reduction

Solving the Dilemma What’s Happening to Existing Policies? Interest Rates are Down Costs of Insurance are High What’s Different about New Policies? Interests Rates are low Mortality costs are Lower Secondary Guarantees

Solving the Dilemma Premium adjustment Reduction of coverage Replace coverage “Insurance Rescue” “Life Settlements”

Solving the Dilemma LIFE INSURANCE RESCUE §1035 Exchange Surrender and Replace Is Insurance Still Needed? Increased Coverage Less Coverage (if any) How many years? Outstanding Policy Loans Phantom Income Internal Erosion

Policy Rescue #1 Old Policy Face $2,000,000 Issue Ages 65M, 63F Policy Age 8 years CSV $238,193 Premium $59,506 Guaranteed to Age 78 Premium $65,859 to Age 94 – Not Guaranteed New Policy Face $2,000,000 §1035 Exchange Premium $60,000 Guaranteed to Age 92 Old vsNew AM BestA- A++ S&PA-AAA Moody’sA3 FitchA+AA+ WeissC+B

Policy Rescue #2 Old Policy Face $3,000,000 Issue Ages 65M, 63F Policy Age 8 years CSV $900,000 Premium $34,500 for 10yrs Guaranteed to Age 75 New Policy Face $3,000,000 §1035 Exchange Premium $ -0- Guaranteed to Age 120

Policy Rescue #3 Old Policy Face $500,000 VUL Issue Age 54 Policy Age 10 years CSV $193,403 Ongoing Premium $894 Non-Guaranteed to Age 100 assuming 6% returns New Policy Face $515,000 §1035 Exchange Premium $-0- Guaranteed to Age 120

Policy Rescue #3a Old Policy Face $500,000 VUL Issue Age 54 Policy Age 10 years CSV $193,403 Ongoing Premium $894 Non-Guaranteed to Age 100 assuming 6% returns New Policy Face $1,000,000 §1035 Exchange Premium $-0- Guaranteed to Age 99

Policy Rescue #4 Old Policy Face $500,000 Issue Age 55 Policy Age 9 years Premium $9300 Outstanding Loan 8% Guaranteed to Age 76 §1035 Not Suitable (Phantom Income) New Policy Face $500,000 Premium $11,821 Premium to Age 100 Guaranteed to Age 120 ($14,402 Additional Cash Surrender Value to Client from Old Policy)

Income Tax Effects §1035 Exchange Basis Carry Forward Avoiding the unseen traps: Caused by policy loans Caused by lapse or surrender Caused by policy changes