1. 12 - 1 Limited-Pay Whole Life Insurance  Characteristics  Provides protection for the entire lifetime  Level or fixed periodic premiums payable for a specified number of years  Level and fixed death benefit  Fixed schedule of cash surrender values that increase of a period of time  Commonly offered with 10, 15, 20, 30 years or longer premium payment periods  Most common form is life paid-up at age 65  Policy is paid-up at the insured age 65  In all other respects, contract features and characteristics are the same as for level premium whole life Chapter 12 Tools & Techniques of Life Insurance Planning

2. 12 - 2 Limited-Pay Whole Life Insurance  When the use of this tool is indicated  To acquire insurance protection for juveniles  To assure protection after age 65 without any further premium requirements  Business life insurance applications  Key employee  Supplemental retirement income plans  Buy-sell funding  When the clients working lifetime or high income period is limited Chapter 12 Tools & Techniques of Life Insurance Planning

3. 12 - 3 Limited-Pay Whole Life Insurance  Advantages  Easier to forecast the total dollar outlay than for ordinary level premium whole life  Cash values build more quickly than ordinary level premium whole life policies  Less risk of policy lapsing if policyowner faces financial difficulties in the future  Disadvantages  Similar to those of ordinary level premium whole life  Premiums are higher than ordinary level premium whole life Chapter 12 Tools & Techniques of Life Insurance Planning

4. 12 - 4 Limited-Pay Whole Life Insurance  Tax Implications  General tax rules  Death benefits income tax free  Death benefits subject to same income, estate, gift and generation skipping transfer taxation rules as all other types of life insurance  Taxation of living proceeds  Governed by IRC section 72  Payments separated into 3 categories  Annuity payments  Payments of interest only  Amounts not received as an annuity Chapter 12 Tools & Techniques of Life Insurance Planning

5. 12 - 5 Limited-Pay Whole Life Insurance  Tax Implications (cont'd)  General tax rules  Death benefits income tax free  Death benefits subject to same income, estate, gift and generation skipping transfer taxation rules as all other types of life insurance  Taxation of living proceeds  Governed by IRC section 72  Payments separated into 3 categories  Annuity payments  Payments of interest only  Amounts not received as an annuity  Annuity payments  Periodic payments received in a systematic liquidation of cash value Chapter 12 Tools & Techniques of Life Insurance Planning

6. 12 - 6 Limited-Pay Whole Life Insurance  Tax Implications (cont'd)  Annuity payments  Periodic payments received in a systematic liquidation of cash value  Each payment is treated partially as recovery of investment and partially as taxable interest  Once entire investment has been recovered, any further payments are treated entirely as taxable income  Payments of interest only  Taxable income whether distributed or credited to account Chapter 12 Tools & Techniques of Life Insurance Planning

7. 12 - 7 Limited-Pay Whole Life Insurance  Tax Implications (cont'd)  Amounts not received as an annuity  Taxed under the “cost recovery rule”  Included in gross income only to the extent they exceed the investment in the contract  Exceptions  Modified Endowment Contracts  Cash distributions taxed under the interest first rule  Loan Proceeds  If a loan is outstanding when a policy is surrendered, gains in the contract are immediately recognized Chapter 12 Tools & Techniques of Life Insurance Planning

8. 12 - 8 Limited-Pay Whole Life Insurance  Alternatives  Combination of level premium deferred annuity and decreasing term insurance  Distributions from annuity taxed under the interest first rule  Term portion may require increasing premium contributions to cover the increasing mortality risk  Combination of investments in tax free municipal bonds and decreasing term insurance  Interest paid on debt secured by municipal bonds is not tax deductible  A universal life policy configured as a level premium policy  Mortality costs and expenses could be increased Chapter 12 Tools & Techniques of Life Insurance Planning

9. 12 - 9 Limited-Pay Whole Life Insurance  What ledger statements do not tell  Rate of return the insurance company earns to warrant the dividend it projects  The investment strategy employed by the insurance company  The conditions in which dividends will be reduced is a loan is taken out against the reserve of the policy  Rate of return  On the death proceeds  On the cash surrender value Chapter 12 Tools & Techniques of Life Insurance Planning