1. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Understanding Policy Loans Presented by… Levi Robinson, CLU, ChFC, FLMI Director Product & Market Training

2. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Agenda  Policy Loan History  Types Fixed, Variable, Participating  How They Work  Which One To Use When  Advance vs. Arrears  Cash Comparisons  Switching Loans  Questions?

3. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Background Information  Prior to 1980  Universal Life not in existence  Primarily Whole life products with dividends  Loans were fixed interest rate  4%- 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

4. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Background Information  Around 1980  Two dividend options were developed  Direct recognition  Variable loan  New products were developed  Existing products amended with policy owner acceptance to change dividend option

5. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC 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

6. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC 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  Spread the first ten years  No spread after 10 years on policy gain

7. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Unique Feature  Indexed life products  Two loan interest choices  Fixed interest  Participating interest  Selected at the time of the loan  One loan type at a time

8. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Policy Loan Types  Fixed Loan – both the loan rate and the borrowed funds are fixed  Variable Loan – Two types where both the loan rate and the borrowed funds participate in an index –  True Variable loan - loan charge rate set by the Moody’s Corporate Bond Average while the funds continue to participate in the index account  Fixed Loan with Participating Funds - Participating variable loan has a fixed loan rate while the funds continue to participate in the index account (less aggressive type of loan structure)

9. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Non Preferred LoanPreferred Loan Effective annual loan rate is 4.00%, payable in advance at 3.85% Annual effective rate of 3.00% credited to the portion of accumulation value that equals the amount of policy loans. Available after the 10 th policy year Up to 10.00% of account value per year Loan rate (not guaranteed) currently equals the credited rate applied to the policy. Effectively 0% net cost. Fixed Interest Rate Loan

10. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Understanding Participating Choice Loans The crediting rate is the same for borrowed and non-borrowed funds The policy value, including the outstanding loan balance, continues to earn interest as if no loan had been taken from the policy.

11. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC 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?

12. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Zero Net Cost Loans vs. Choice Loans Indexed Account $80,000 Indexed Account $100,000 9.28% -3%3% 6.00% Preferred Fixed Loan = 3% - 3% Choice Loan = Indexed Account Growth Rate 6.00% Opportunity for positive net loans Indexed Account $100,000 9.28% Loan Account $20,000 Fixed Loan $20,000 Choice Loan $20,000

13. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Expect market to be flat or down? Fixed Interest Rate Loan  Less expensive  Withdraw to basis and then loan provides greater cash flow

14. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Expect market to be strong? Choice Loan  “Arbitrage” possible  Could be greater cash value in the long run  Generally illustrates more cash flow than fixed  100% loan illustrates greater income stream

15. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Arrears vs. Advance Rates Arrears Payments Made at the End of a Period Advance Payments Made at the Beginning of a Period

16. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Loan Rate Example $10,000 Loan Taken at the Beginning of a Policy Year With a 6.00% Annual Interest Rate in Arrears. The Loan Interest Due at the End of the Year (or added to the loan) is $600. If interest is paid out-of-pocket at the beginning of the year (a.k.a. In Advance), Less than $600 in interest is owed. The In Advance equivalent rate is 5.66%. Loan Interest out-of-pocket paid at the beginning of the year would be $566.

17. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Loan Rate Illustration For Illustrative Purposes, the advance rate is converted to an arrears rate and is used to calculate a year-end interest amount that may be assumed to be paid out of pocket or added to the loan.

18. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Fixed Loans OnlyFixed & Choice Loans Elite IndexAG Choice Index GUL Elite Survivor IndexElite Global Plus II Elite Global Survivor AG Extend IUL AG Secure Lifetime GUL AG Secure Survivor GUL Elite UL Which Products?

19. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Cash Value Comparison Fixed Interest vs. Choice Loans Male 40, Preferred Non-Tobacco Elite Global Plus II Death Benefit: Minimum Solve Premium: $20,000 Annual to age 47 Death Benefit Option: 2 Policy loan starting @ 65 - 90 Age 65 cash value = $653,810 Solve for income from age 65 to 90 Choice loan interest rate = 6.00% Fixed loan interest rate = 4.00%

20. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC  Ability to switch from a Choice loan to a fixed interest rate loan (vice versa)  Up to a maximum of two times during life of contract Changing Loan Types

21. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Switching Loans…  Client has been taking $20,000 in Choice Loans for 10 years and is age 70  At age 70 the S&P is down and the client is only earning the minimum guarantee which is now 0.00% in the Elite Global Plus II 5-Year Global Strategy  When the client began taking out loans he/she was averaging a 9.28% 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%

22. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC When to Switch?

23. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Which option is better? It Depends on… Market Conditions Interest Rate Environment Each Individual Policy Owner

24. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Variable Loans Pros & Cons Pros Allows indexed 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 Variable 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 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. Allows the opportunity for the index to outperform the loan rate being charged. Loan charge could change on previous loans

25. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC Questions or Comments

26. FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC The information presented herein is not a comprehensive analysis of the topic presented. Please be advised that any information provided in this presentation is for informational purposes only and should not be construed by any person as legal, tax or accounting advice. The insurers comprising American General Life Companies strongly suggest that any life insurance owner, proposed owner, insured or proposed insured retain the services of qualified tax, accounting and legal counsel for advice on matters presented herein. The insurers comprising American General Life Companies are solely providers of insurance products. Policies issued by American General Life Insurance Company (AGL), 2727-A Allen Parkway, Houston, Texas 77019, The United States Life Insurance Company in the City of New York (US Life), One World Financial Center, 200 Liberty Street, New York, New York 10281, AG Secure Lifetime GUL Policy Form Numbers 10460, ICC-10460, AG Secure Survivor GUL Policy Form Numbers 11239, ICC-11239, AG Choice Index GUL Policy Form Number 11474, Elite Global Plus II Policy Form Numbers12967, ICC-12967, Elite Index AGL-08326; USL-08326N, Elite Survivor Index AGL-08414, USL-08414N, AG Extend IUL AGL-12436, ICC12-12436, USL-12436N, Elite UL AGL-03325, USL-03325N. The underwriting risks, financial and contractual obligations and support functions associated with products issued by AGL and US Life are the issuing insurer’s responsibility. All guarantees are subject to the claims- paying ability of the issuing insurance company. US Life is authorized to conduct insurance business in New York. Policies and riders not available in all states. American General Life Companies, www.americangeneral.com, is the marketing name for a group of affiliated domestic life insurers including AGL and US Life. Cases are presented for illustrative purposes only. AGLC107038 ©2013. All rights reserved. Important Information Cases are presented for illustrative purposes only."