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 LifeUniversal Life Variable Universal LifeWhole Life

Term Life

Annual Renewable Term Increasing premiumsLevel Death Benefit

Level Premium TermLevel premiumsLevel Death BenefitGuaranteed Period

Term Life cont.

Return of Premium TermLevel PremiumsConversion Age

Paid Up Life InsuranceReturn of Premium (not taxable)

Universal Life

Flexible Premium Adjustable Whole Life Level OR Increasing Death Benefit Flexible Premiums Non-Guaranteed

Interest AssumptionsMortality Costs

General Account Returns

Variable Universal Life

Flexible Premium Adjustable Whole Life

Level or Increasing Death BenefitFlexible PremiumsNon-Guaranteed

Interest AssumptionsMortality Costs

Individual Account Returns

Whole Life

Guaranteed Death BenefitGuaranteed PremiumGuaranteed Cash ValueNon-Guaranteed Dividends

“We Promise to Pay”

Whole Life ONLYThe Guarantees of Whole Life

Premium GuaranteesDeath Benefit GuaranteesCash 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 requiredSame premium for more yearsMore 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 adjustmentReduction of coverageReplace 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 vsNewAM Best A- A++S&P A- AAAMoody’s A3Fitch A+ AA+Weiss C+ 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

$45,552 @ 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