1. Understanding IUL Policy Loans Presented by…
Policies issued by American General Life Insurance Company ("AGL“)

2. Disclaimer
The information presented herein is not a comprehensive analysis of the topic presented, and the viewer should consult tax and legal advisors to understand all the ramifications of the topics discussed.
This information is general in nature and may be subject to change. The Company, its financial professionals and other representatives are not authorized to give legal, tax or accounting advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your situation, consult your professional attorney, tax advisor or accountant.
To ensure compliance with requirements imposed by U.S. Treasury Regulations, we inform you that any tax advice contained in this presentation (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
This Disclaimer should be read to the audience to ensure its understanding of the IRS Circular 230 requirements and to emphasize that American General Life Insurance Company ("American General Life") is a product provider only. The presentation provided is for educational purposes only and American General does not endorse or promote the concept presented. The concept presented is made available for the purpose of informing American General’s appointed agents that such concepts exist and that clients who may be interested in investigating such concepts seek the counsel and services of their independently retained experts and advisors on such matters.
FOR AGENT USE ONLY - NOT FOR DISSEMINATION TO THE PUBLIC

3. Long-Term Yield Advantage Over CAUL
IUL Value Proposition
Market Upside
Long-Term Yield Advantage Over CAUL
Another way to think of an IUL policy as far as the design is diagramed in this slide. We already talked about the market upside and the downside protection. But what an IUL is really designed to do is potentially out perform traditional cash value life insurance.
Downside Protection

4. The IUL Market
Index life sales for the third quarter of 2015 were $478.6 million, compared with sales of $372 million for the third quarter of 2014.*
Third quarter index life sales were up more than 4% when compared with the previous quarter, and up nearly 28% as compared to the same period last year.*
Since the first IUL was released in January of the 1997 the sales have increased substantially. Just take a look at 3rd quarter last year for example. Index life sales were $478.6 million, compared with sales of $372 million for the third quarter of Third quarter index life sales were up more than 4% when compared with the previous quarter, and up nearly 28% as compared to the same period last year.
*Source: 11/25/2015

5. Benefits of Index Universal Life Insurance
Do your clients know they can use life insurance for protection, retirement and long-term wealth accumulation?
Unlike the limited contribution levels of IRAs and 401(k) plans, there are few limits to the amount of money they can put to work in a life insurance strategy.
There are no income-based participation restrictions and no tax penalties on distributions at any age.1
Properly structured distributions can be tax-free.
The tax-free life insurance death benefit can help assure that your clients’ objectives are achieved – even if they die too soon.
There any many benefits of owning an index universal life insurance policy. Do your clients know they can use life insurance for protection, retirement and long-term wealth accumulation?
Unlike the limited contribution levels of IRAs and 401(k) plans, there are few limits to the amount of money they can put to work in a life insurance strategy.
There are no income-based participation restrictions and no tax penalties on distributions at any age.
Properly structured distributions can be tax-free.
The tax-free life insurance death benefit can help assure that your clients’ objectives are achieved – even if they die too soon.
1 If policy is not a Modified Endowment Contract (MEC), please consult a tax advisor to confirm tax-free eligibility.

6. Background Information
Prior to 1980
Whole life products with dividends
Loans were fixed interest rate (4% to 6%)
High interest rate environment
Policy owners could borrow from policy and reinvest at rates as high as 16%
Negative impact on insurers’ investment portfolio if there were too many loans
Around 1980
Two dividend options were developed
Direct recognition
Variable loan
New products were developed
Existing products amended with policy owner acceptance to change the dividend option
Prior to 1980 Universal Life was not yet in existence the primary products being sold were Whole Life. WL policies paid dividends which helped enhance the policy’s cash values which in turn could be borrowed. Policy owners could borrow these funds by taking fixed loans that charge a fixed interest rate anywhere between 4%-6%.
By the end of the 70’s interest rates were beginning to climb and policy owners began borrowing from their life policies at fixed rates and were reinvesting these borrowed funds at rates as high as 15%-16%.
As you may be aware this had a negative impact on the insurers’ investment portfolio because too many policy owners were borrowing from their policies.
In an attempt to rectify the fixed loan problems insurers’ were experiencing, in the early 80’s two dividend options where developed Direct Recognition and Variable Loans. With the direct recognition option the client would borrow funds from their policy at a fixed interest rate, however the company would lower dividends paid to the contract. With the Variable loan option, the client would accept a higher variable loan rate, however there was no effect on dividends.
Companies also began to look at existing policies and offered clients the ability to take a higher rate (Variable Loan) on their policy and we (insurer) will add enhancements to their policy.

7. Background Information
Direct recognition:
Fixed loan interest rate
Usually 8%
Loans from policy would reduce the annual dividends payable
Variable loan:
Loan interest rate variable
Based on a Moody Bond average
Dividends not affected by loans
From a insurance and pricing stand point both Direct Recognition and Variable Loans were equal.

8. Universal Life introduced
Background Information
Universal Life introduced
Fixed loan product (direct recognition)
Typical loan
6% to 6.5% loan interest
4% credited interest on borrowed money
2% to 2.5% spread
Loan modified mid-80’s
fixed policy loans taken after the 10th policy year
credited rate for their borrowed funds was equal to the fixed loan rate
Wash Loan
Zero Net Cost Loan
When the Universal Life plans were introduced, fixed policy loans were the primary loan option. The typical loan interest rate was anywhere from 6%-6.5% however additional modifications were made. The client’s borrowed money earned a crediting rate around 4% while being charged around 6% in essence a 2% spread or cost for the loan. Additional modifications where added to fixed policy loans taken after the 10th policy year. In the instance, the client’s credited rate for their borrowed funds was equal to the fixed loan rate in essence giving the client a zero spread or what commonly became known as a “Wash Loan” or “Zero Net Cost Loan”.

9. What options are available in an IUL policy for clients to access the cash value today?
One of the many attractive features of permanent life insurance is the ability of the policy owner to access the cash value of the policy during life on a tax favored basis. Assuming the policy is not classified as a modified endowment contract (MEC), a policy owner can make income tax-free withdrawals up to his/her “investment in the contract” (cost basis). In addition to (or as an alternative to) policy withdrawals, the policy owner may access the cash value via policy loans.
What options are available in an IUL policy for clients to access the cash value today?

10. Policy Loans or Withdrawals
Loans and withdrawals each have differentiated characteristics and impact the policy in different ways
The portion of a withdrawal that is greater than premiums paid into the policy is subject to income tax.
Policy loans are not taxed since the policyholder is required to pay back the loan balance either out of pocket for via the policy’s death benefit.*
Loans and withdrawals on a life insurance policy each have differentiated characteristics and impact the policy in different ways.
The portion of a withdrawal that is greater than premiums paid into the policy is subject to income tax.
Policy loans are not taxes since the policyholder is required to pay back the loan balance either out of pocket or via the policy’s death benefit. Assuming the policy is not a MEC and does not lapse.
*Assuming policy is not a Modified Endowment Contract and does not lapse.

11. How do Withdrawals Impact the Policy? Reduces account values
Reduces death benefit
Potential taxable income
Lower interest earning power since cash values are reduced
Withdrawals from a policy:
Reduce the account value
Reduce the death benefit
Are potentially treated as taxable income
And, lower the overall interest earning power since cash values are reduced by the withdrawal amount

12. Potential for positive interest earnings on loaned money
Benefits of Policy Loans
Tax-free income*
Potential for positive interest earnings on loaned money
Fast access to cash when needed
No repayment plan required
Policy loans on index universal life insurance policies can provide many benefits. The first potential benefit is if the policy is structured correctly and not a modified endowment contract than the policy owner has the ability to access the cash value, income tax free. And depending on the loan type there is potential for positive interest earnings on the loaned money. The cash value in an IUL can be accessed whenever and for whatever purpose. Even before age 59 ½ without any tax penalties if structured properly. And there is no repayment plan required. The outstanding loan balance can be paid off with a portion of the death benefit at the insured’s death.
*Assuming policy is not a MEC and does not lapse

13. Policy Loan Types Loan Type Interest Credited Interest Charged
Standard
Fixed
Non-participating
2% interest
Known in advance
3% rate or 8% rate*
Preferred
2% rate
Walk through loan rates on slide.
Participating
Index interest
Declared
5% rate
*varies by product selected

14. Policy Loan Types Standard Loan Fixed Rate – Known in Advance
Available in any policy year as long as there is positive cash surrender value
Non-Participating - Loaned amounts are removed from the index, declared interest, and interim accounts on a pro-rata basis
Typically 1% - 6% Net Loan Rate
Potential for positive interest earnings on loaned money
Potential for positive interest earnings on loaned money
Potential for positive interest earnings on loaned money
First let’s look at the details on the standard loan. First as we mentioned on the last slide the rate for this loan type is a fixed rate with is known in advance. A standard loan is available in any policy year as long as there is positive cash surrender value. This loan type is non-participating meaning the loaned amounts are removed from the index, declared interest, and interim accounts on a pro-rate basis. Typically this loan type offers a net loan rate of 1%.
*Assuming policy is not a MEC and does not lapse

15. Available in policy years 11+
Policy Loan Types
Preferred Loan
Works the same as Standard Loans, BUT:
Available in policy years 11+
Limited to 10% of the accumulation value at the beginning of the policy year.
Next let’s look at the preferred loan. The mechanics of this loan work the same as the standard loan but with few differences. First this loan type is not available until policy year 11 and beyond and is limited to 10% of the accumulation value at the beginning of the policy year. A preferred loan also currently offers a credited rate equal to the loan rate this equaling a 0% net cost. These are sometimes referred to as a wash loan or zero net cost loan.
0% Net Cost

16. Index or Fixed Account Interest Loan amount is removed from cash value
How It Works
Preferred Loan
Index or Fixed Account Interest
Loan amount is removed from cash value
$200,000
$20,000
Starting Cash Value
Loan
Here is an example of how a preferred loan works. In this example let’s start with an IUL policy that currently has $200,000 of starting cash value. And this client decides to take a $20,000 loan. When the loan is paid to the policyholder the entire loan amount is removed from the cash value thus no longer getting crediting any index interest earnings. The policyholder is then credited 2% on the loaned amount and charged 2% equaling a 0% net cost.
$180,000
Cash Surrender Value
Remaining Cash Value 0%
Net Cost
2% Credited
2% Charged

17. Policy Loan Types Participating Loan
Available in any policy year as long as there is positive cash surrender value
Company declared rate – 5%
Can be changed after policy issue
Loaned amounts are NOT removed from accounts and are still eligible for index or excess interest
Participate in index returns = potential for positive arbitrage
And finally let’s walk through participating loans. This loan type is available in any policy year as long as there is positive cash surrender value. The rate is fixed at the companies declared rate which is a company declared rate of 5%. The rate can be changed after policy issuance. With participating loans one key difference between this loan type and the other two discussed is that the loaned amounts are NOT removed from the accounts and are still eligible for index or excess interest earnings. Because this loan type participates in index returns there is potential for positive arbitrage. Next is an example.

18. How It Works Participting Loan $200,000 Fixed Charged
Index or Fixed Account Interest
Loan amount still in account - full cash value remains
$20,000
Loan
$200,000
Here we are starting with same index life insurance policy as in the previous example with a current cash value of $200,000. Once again this policyholder decides to take out a $20,000 loan. But this time they are taking a participating loan. The major difference is that the $20,000 participating loan is not removed from the cash value and is still earning index interest. The rate than that is charged is a fixed rate of 5%. Which can result is positive or negative net cost.
Index Interest Credited
Fixed Charged 5%
Cash Value
Positive or Negative
Net Cost

19. A B C Choice Loan Example Hypothetical Index Interest Credited
Current Loan Interest Charged
Spread = A-B 1% 5%
-4% Loss 0% 8%
3% Gain
11%
6% Gain

20. Actuarial Guideline 49 Policy Loans

21. Policy Loans
– effective
AG 49 will limit the interest rate differential that can be illustrated between the interest rate credited to loaned amounts and the corresponding loan rate that is charged to that balance (sometimes referred to as “loan leverage” or “loan arbitrage”).
If the illustration includes a policy loan, the illustrated rate credited to the loan balance cannot exceed the illustrated loan charge by more than 1%.
The next change is in regards to policy loans. This change does not go into effect until 3/1/2015.
AG 49 will limit the interest rate differential that can be illustrated between the interest rate credited to loaned amounts and the corresponding loan rate that is charged to that balance (sometimes referred to as “loan leverage” or “loan arbitrage”).
If the illustration includes a policy loan, the illustrated rate credited to the loan balance cannot exceed the illustrated loan charge by more than 1%.

22. How will this change affect American General Life’s IUL products?
American General Life’s IUL products offer a fixed participating loan called a Choice Loan which charges a 6% loan rate.
AG 49 will now limit the max illustrated rate that could possibly be credited to the loaned balance to 1% more than the 5%, which results in 6% in this example, or the stated policy maximum illustrated rate if it is lower.
Illustrations also include a mandatory ledger at an alternate 6% illustrated rate.
American General Life’s IUL products offer a fixed participating loan called a Choice Loan which charges a 6% loan rate.
AG 49 will now limit the max illustrated rate that could possibly be credited to the loaned balance to 1% more than the 5%, which results in 6% in this example, or the stated policy maximum illustrated rate if it is lower.
Again, this does not affect the actual index interest crediting to the index accounts, and it is for illustration purposes only.
American General Life was ahead of the new guideline when it comes to this change.
Illustration practice was not one that relied on extreme loan arbitrage between a low loan rate and a high illustrated interest rate.
Illustrations also included a mandatory ledger at an alternate 6% illustrated rate.
This very prudently removed any loan arbitrage when using the 6% Choice Loan rate.

23. Additional Loan Information
Loan option is chosen at time of request, not issue
Only one loan type is available at a time
Client has the ability to switch from a Standard Loan to a Choice Loan, or vice versa
Maximum of 3 times during the life of the contract
Entire loan balance switches

24. Switching Loans…For Example,
Client has been taking $20,000 in participating loans for 10 years and is age 70
At age 70 the S&P 500 is down and the client is only earning the minimum
guarantee which is now 0.25% on the 1 year point-to-point in this
hypothetical example
When the client began taking out loans he/she was averaging a 7% rate of return
With this feature the client can elect to switch to a fixed loan without paying off the outstanding loan balance and now have a much lower fixed rate with a portion paying 0.00%

25. How Much?
The maximum loan amount a policy holder may take is equal to the policy’s cash surrender value less three times the amount of the charges we assess against the accumulation value on the monthly deduction day, less loan interest that will be payable on the loan to the next policy anniversary.
How much can the client take via a loan? The maximum loan amount a policy holder may take is equal to the policy’s cash surrender value less three times the amount of the charges we assess against the accumulation value on the monthly deduction day, less loan interest that will be payable on the loan to the next policy anniversary.

26. Withdrawal to Basis, then Borrow
Cash Value Comparison
Fixed Interest vs. Choice Loans
7.38% ROR
Male 45, Preferred Non-Tobacco
Index Universal Life Policy
Death Benefit: Minimum Solve
Premium: $10,000 Annual to age 64
Death Benefit Option: 2
Policy loan
100% Loan
Income Payout
Age 100 Cash Value
Participating Loan
$39,564
$891,651
Fixed Loan
$33,581
$27,708
Withdrawal to Basis, then Borrow
Income Payout
Age 100 Cash Value
Participating Loan
$36,460
$519,544
Fixed Loan
$33,943
$20,451
Age 65 cash value = $394,492
Solve for income from age 65 to 90
Choice loan interest rate = 6.00%
Fixed loan interest rate = 4.00%
Hypothetical Information Presented as an Example

27. Participating Loans Pros & Cons
Allows index values to remain & participate in the performance of the index/indices account
Allows the opportunity for the index to outperform the loan rate being charged.
Heavily marketed by some carriers
Participating loans illustrate higher disbursements compared to standard loans
Becomes an illustration game - easy to out-illustrate other competitors, especially with a true variable loan structure
AG 49 Changes
Cons
Possibility the amount credited from index interest or fixed interest accounts is less than the interest charged
Risk if index performs at less than the interest charged, the policy could lapse or income reduced
Illustrations almost always show a “positive” spread.
New AG 49 Ledger
Allows the opportunity for the index to outperform the loan rate being charged.
Loan charge could change on previous loans
The advantages and disadvantages of variable loans…read slide

28. Important Information
Policies issued by: American General Life Insurance Company (AGL), except in New York, where issued by The United States Life Insurance Company in the City of New York (US Life). Issuing companies AGL and US Life are responsible for financial obligations of insurance products and are members of American International Group, Inc. (AIG). Policies and riders not available in all states.
Guarantees are backed by the claims-paying ability of the issuing insurance company.
Prior to soliciting business, be certain that you are appropriately licensed and appointed with the insurer and that the product has been approved for sale by the insurer in that state. If uncertain, contact your American General Life Insurance Company representative for assistance. 
AGLC ©2016. All rights reserved.
Thank you for taking the time to listen to this BrainShark.

29. Attached you will find additional information about American General Life’s IUL portfolio of products.
American International Group, Inc. (AIG) is a leading international insurance organization serving customers in more than 130 countries.. AIG companies serve commercial, institutional, and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG common stock is listed on the New York Stock Exchange and the Tokyo Stock Exchange.
Additional information about AIG can be found at | YouTube: | | LinkedIn:
AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. For additional information, please visit our website at All products and services are written or provided by subsidiaries or affiliates of American International Group, Inc. Products or services may not be available in all countries, and coverage is subject to actual policy language. Non-insurance products and services may be provided by independent third parties. Certain property-casualty coverages may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds, and insureds are therefore not protected by such funds.