4 - 1 How To Determine The Right Policy  Areas of analysis  Selection of the proper type of product  Deciphering life insurance policy illustrations  Reviewing policy comparison measurements  Studying company comparison measurements Chapter 4 Tools & Techniques of Life Insurance Planning

4 - 2 How To Determine The Right Policy  Selection of the proper type of product  Personal preferences  “Own” versus “renting” insurance  Cash accumulation versus buy term and invest the difference  Rules of thumb  Buy term  If risk taking propensity is high  If client has a lease versus own preference  Buy permanent  If client has an “own rather than loan” preference  If client wants something to show for the money  Buy a blend  if client is somewhere in between these two preferences Chapter 4 Tools & Techniques of Life Insurance Planning

4 - 3 How To Determine The Right Policy  Amount of insurance needed  Rules of thumb  Buy term when there is no way to satisfy the death need without it  Buy a combination of term and permanent insurance  Client can cover the entire death need, and  Able and willing to allocate additional dollars to appropriate permanent coverage  Cash flow considerations  Multiple premium cash flow combinations (examples)  Pre-pay coverage as fast as possible  Limited payments over a regular interval  Pay premiums over a lifetime Chapter 4 Tools & Techniques of Life Insurance Planning

4 - 4 How To Determine The Right Policy  Cash flow considerations (cont'd)  Rules of Thumb  Prepay coverage if the client expects to live longer than average  Pay on an installment basis if the client expects to face a greater than average mortality risk  Purchase YRT if the client wants to pay the absolutely minimum premiums  But is willing to pay increasingly larger premiums each and every year  Duration of need considerations  Needs less than 10 years – Term  Needs 10 to 15 years – Term and/or permanent coverage Chapter 4 Tools & Techniques of Life Insurance Planning

4 - 5 How To Determine The Right Policy  Duration of need considerations (cont'd)  Needs 15 years or more – Permanent coverage  Needs to cover buy-sell agreement – permanent coverage  Needs to cover estate taxes – permanent coverage  How to decipher policy illustrations  Identify the columns  Premiums, cash values, death benefits  Policy dividends Chapter 4 Tools & Techniques of Life Insurance Planning

4 - 6 How To Determine The Right Policy  How to decipher policy illustrations (cont'd )  Critical questions to ask  What does the client pay versus what the client gets if the client lives and the beneficiaries receive if the client dies?  What portion of those amounts are guaranteed and what portion of those amounts are not?  What interest or other assumptions are built into these figures?  Emphasis on  Surrender charges  Cash value projections  Policy loans  Dividends Chapter 4 Tools & Techniques of Life Insurance Planning

4 - 7 How To Determine The Right Policy  How to decipher policy illustrations (cont'd)  Surrender charges  Difference between the gross cash value and the net surrender value for the given year  Cash value projections  Based on the guaranteed interest rate versus current portfolio earnings  Questions to ask  Are the assumptions realistic?  Does the guaranteed cash value drop to zero after some duration?  When does the policy lapse? Chapter 4 Tools & Techniques of Life Insurance Planning

4 - 8 How To Determine The Right Policy  How to decipher policy illustrations (cont'd)  Policy Loans  Ledger statement will indicate the interest rate charged and if it is fixed or variable  If variable – is it reasonable over the policy period?  Dividends  Dividends are not guaranteed  Are dividends reduced when loans are outstanding?  What interest rate must the company earn to support policy dividends?  Ledger statement should reflect how dividends are being used Chapter 4 Tools & Techniques of Life Insurance Planning

4 - 9 How To Determine The Right Policy  How to decipher policy illustrations (cont'd)  Dividends (cont'd)  Questions to ask  Is illustration from the home office or from the agent’s computer?  Does the illustration use a reasonable interest rate assumption?  Are dividends “puffed”?  Are cash flow amounts in one illustration comparable to those in another?  For universal life policies  What variables are incorporated in the illustration?  Insist all competitive illustrations use the same assumptions Chapter 4 Tools & Techniques of Life Insurance Planning

How To Determine The Right Policy  How to compare policies  The Traditional Net Cost Method [Sum of Premiums Paid] – [Sum of Dividends] – [Net Cash Value] Face Amount of the Policy (in thousands) Step 1divided by the number of years index is targeting  This measure ignores the time value of money Chapter 4 Tools & Techniques of Life Insurance Planning

How To Determine The Right Policy  Example - The Traditional Net Cost Method * 1.Total Premiums$ Minus Total Dividends Equals Total Net Premiums$ Cash Value Year 10$ Plus Terminal Dividend Minus surrender charge Equals Net Cash Value$ Total Premiums$ Minus Net Cash Value Equals Total Net Cost$ Total Net Cost$ Divided by Number of Years / 10 Equals Traditional Net Cost Per $1,000 Per Yr. = $0.205 * All premiums, dividends, and cash values are per $1,000 of coverage Chapter 4 Tools & Techniques of Life Insurance Planning

How To Determine The Right Policy  How to compare policies (cont'd)  The Interest-Adjusted Cost Methods  Compare the cost of policies considering that money spent on premium dollars could have been invested elsewhere and earned a minimum after-tax return  Interest-Adjusted Net Surrender Cost Index  Relative measure of the cost of a policy assuming it is surrendered  Interest-Adjusted Net Payment Cost Index  Relative measure of the cost of a policy assuming the insured dies Chapter 4 Tools & Techniques of Life Insurance Planning

How To Determine The Right Policy  Example – Interest Adjusted Surrender Cost Index* 1.Total Premiums 5%$ Minus Total 5% Equals FV Net Premiums$ Cash Value Year 10$ Plus Terminal Dividend Minus surrender charge Equals Net Cash Value$ FV Net Premiums$ Minus Net Cash Value Equals FV Net Cost$ FV Net Cost$ Divided by Annuity Due Factor / Equals Surrender Cost Index(Per $1,000) $4.56 *All premiums, dividends and cash values are per $1,000 of coverage Chapter 4 Tools & Techniques of Life Insurance Planning

How To Determine The Right Policy  Example – Payment Cost Index* 1.Total Premiums 5%$ Minus Total 5% Equals FV Net Premiums$ FV of Net Premiums$ Divided by Annuity Due Factor / Equals Payment Cost Index(Per $1,000) $ * All premiums, dividends and cash values are per $1,000 of coverage Chapter 4 Tools & Techniques of Life Insurance Planning