An Alternative to Roth IRAs When Limits Apply

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1 Consumer Material I Index Universal Life Insurance FINANCIAL STRATEGY An Alternative to Roth IRAs When Limits Apply Using Asset Builder Index UL II Sometimes success presents challenges of its own. You have worked hard over your career and now have some extra income you d like to put towards retirement. But your income and the amount you plan on setting aside could limit your options particularly if you re seeking tax-deferred growth and tax-free retirement income. For many people seeking these tax advantages, Roth IRAs fit the bill. Of the different types of IRAs, the Roth IRA is the fastest growing 1 and it s easy to see why. Although you cannot deduct your contributions to a Roth, a Roth IRA provides a tax-free stream of income at retirement. Not only do the distributions come out tax-free, but the earnings in the account are tax-free also. Tax-free earnings compounded over many years can make a tremendous difference in what you can accumulate for retirement and in the income received at retirement. However, you may not be able to participate in a Roth IRA. Even if you can, your contributions may be limited. In 2015, the maximum contribution is $5,500 ($6,500 if age 50 or over). At higher incomes (married taxpayers with Modified Adjusted Gross Income (MAGI) of $183,000 to $193,000, and single taxpayers with MAGI of $116,000 to $131,000) allowable contributions are reduced or phased out completely. Meet Dale 45 years old and in good health Married with two kids (ages 10 and 12) As an executive for a large auto company he makes around $250,000 per year If you re among the people who cannot contribute to a Roth because of these income limits or who would like to contribute more than the allowable maximum, you may want to consider alternatives with some of the same advantages. Life insurance underwritten by Genworth Life and Annuity Insurance Company, Genworth Life Insurance Company, Richmond, VA /20/15

2 Index Universal Life Insurance as a Roth IRA Alternative First and foremost, Index Universal Life (UL) Insurance is a life insurance policy that can provide the death benefit protection you need. In addition, it may be an alternative to a Roth IRA when contribution limits apply because it shares many of the tax attributes of the Roth without some of its contribution limitations. The following chart compares some of the features of a Roth IRA with those of an Index UL Insurance policy: Roth IRA Index UL Tax-free distributions? Yes, if age 59½ and held for at Yes, if policy is not a MEC 2 least 5 years Tax-free to beneficiary at death? Yes Yes 3 Tax deferred growth? Yes Yes Tax-deductible contributions? No No Required minimum distributions? No No Penalties for distribution prior to age 59½? Yes No, if policy is not a MEC 4 Assign as collateral for a loan? No Yes,* may restrict access to cash value Provides coverage for long term care expenses? Earned income required? Yes No Limits on contributions/premiums? Meet Dale No 2015 maximum contribution $5,500; $6,500 if age 50 or over Eligibility subject to income limits? Yes No Life insurance death benefit protection? No Yes Yes, w/ optional riders available for an additional charge Subject to underwriting, federal definition-of-life-insurance limits, contractual and MEC guidelines Cost of insurance? No Yes, varies by attained age and underwriting class Expenses? Varies by financial product held within the account *Assignment of a MEC as collateral could trigger recognition of income Expenses and other charges stated in policy Let s look at someone who might benefit from an Index UL policy as a Roth Alternative. Dale is an executive for a large auto company and makes $250,000 per year. He is 45 years old, in good health, and is very proud of his wife and two young children. Dale is contributing the maximum amount to his employer s 401(k) plan. He has several financial needs and concerns that he is trying to address. First, he d like some additional life insurance protection especially while he is working and during his early retirement years. His only current life insurance protection is provided by his employer s group insurance plan. Second, he has determined that his 401(k) will not provide him enough savings for retirement. Finally, he s concerned about the potential effect of rising tax rates on his investment returns and his future retirement income. Dale would like to make a $5,000 annual contribution to a Roth IRA to supplement his 401(k) savings plan. However, because his income exceeds the current Roth IRA phase-out limit of $183k-$193k (2015) he cannot directly contribute to a Roth. Even if he could contribute to a Roth IRA, it would not provide the life insurance protection that he also needs.

3 How Asset Builder Index UL II works for Dale Two needs. One solution. An Index Universal Life (Index UL) Insurance policy could help Dale provide death benefit protection for his family while enjoying considerable tax advantages. Dale can pay $5,000 per year in premiums for an Asset Builder Index UL II policy that would provide an income tax-free death benefit, 3 provide tax-deferred growth of policy cash values based on index-linked interest credits, and enable Dale to access his policy cash value on an income taxfree 2 basis to supplement his retirement income. Dale s scenario as illustrated: Assuming a hypothetical 6.5% illustration rate, Dale s policy would accumulate $173,480 of cash value by the time he reaches age 65. The policy could generate tax free income (withdrawals to basis then loans) of $11,912 per year from the age of 65 to age 100. In short, by paying for the policy with total premiums of $100,000 over 20 years, he is able to receive total distributions of $416,920. Along with the remaining $3,552 death benefit, this represents an internal rate of return of 5.73%. 5 Age Age Dale s Planned Premiums $5,000 per year 20 Years Total Premiums Paid $100,000 Pay Premiums $5,000/year x 20 years Receive Income $11,912/yr x 35 years Net Death Benefit $112,110 $281,372 $269,460 $3,552 Premiums $100, Loans/Withdrawals -0- $416,920 This Preferred Best No Nicotine Use example is for illustrative purposes only and it assumes current, non-guaranteed charges. This example does not include the optional Long Term Care Rider. Even a slight change in the actual experience from the assumptions could produce significantly different policy values. It is possible that coverage will expire when either no premiums are paid following the initial premium or subsequent premiums are insufficient to continue coverage. While the insurer may change cost of insurance charges, this will not affect the no-lapse guarantee s minimum monthly premium. The initial death benefit under his policy is $112,110, 6 which would increase to $269,460 by age 65. The total net death benefit payable to Dale s beneficiaries would then decrease over time as Dale starts taking tax-free withdrawals and/or loans from the policy during his life.

4 Asset Builder Index UL II A summary The chart below shows how this policy can provide a combination of death benefit protection and supplemental income for Dale: Total Benefits and Costs at Current Crediting Rate and Policy Charges Distributions Net Death Benefit Premiums Paid Total Policy Charges This chart shows non-guaranteed values and benefits using the assumptions defined in this hypothetical example. A basic illustration should be run for your specific situation. Distributions begin 600, , ,000 $387,066 $427,688 $420, ,000 $293,284 $298, ,000 $164, ,000 0 Point in Time Scenarios Age at Death Total Policy Charges $10,690 $17,756 $22,301 $25,596 $32,243 $33,359 Total Premiums Paid $55,000 $100,000 $100,000 $100,000 $100,000 $100,000 Net Death Benefit $164,699 $281,372 $167,531 $136,914 $58,416 $3,552 Total Distributions $11,912 $131,032 $250,152 $369,272 $416,920 Total Benefits $164,699 $293,284 $298,563 $387,066 $427,688 $420,472 Dale s policy can provide him: Income tax-free death benefit Income tax-deferred policy value growth Index-linked crediting potential without downside index performance risk In most circumstances, income tax-free distributions 2 Flexibility to access policy value prior to age 59½ without federal tax penalties as long as the policy is not a Modified Endowment Contract (MEC) 4

5 What if? Although unlikely to occur, this hypothetical scenario shows no interest credited greater than 1% per year for a 45-year-old male with Preferred Best No Nicotine Use rates. It also includes maximum insurance charges. This does not reflect any benefit of index-linked crediting rates, only the guaranteed rates provided in the policy. Age Age Age 80 Dale s Planned Premiums $5,000 per year 20 Years Total Premiums Paid $100,000 Pay Premiums $5,000/year x 20 years No Withdrawals or Loans Taken, No Income Received Policy Lapses Net Death Benefit $281,372 $281,372 $269, ,058 $0 Premiums $100,000 Loans/Withdrawals In this example the policy lapses at age 80. Managing your policy It s important to understand any index UL policy and evaluate its performance over time to make sure it is on target to meet your goals. Annual policy reviews are important. You should work with your financial professional to adjust your premiums, withdrawals, death benefits and index interest crediting strategy(ies) as conditions change. You should not take too much out of your policy in withdrawals or loans; there could be tax consequences. If you re taking loans, there is an Overloan Protection Rider that can be activated (for a charge, once certain conditions are met), 7 which is designed to keep your policy from lapsing. Additionally if the index interest credited to the policy is less than the assumptions used, your distribution strategy may have to be curtailed as the policy would have a higher likelihood of lapsing using the current scenario of distributions. Conversely, if the index interest credited to the policy were greater than the assumptions used, you would likely have even more flexibility with regard to your distribution strategy. Depending on the actual interest rate charged and the index-linked crediting rate earned, participating loans may amplify positive or negative policy performance.

6 1 ICI Report: The IRA Investor Profile: Roth IRA Investor s Activity, , June A withdrawal may be free of federal income tax or tax-free. If the policy is not a Modified Endowment Contract (MEC), then, except for certain changes in the policy during the first 15 policy years and especially during the first five policy years that cause cash distributions that may be taxable although they do not exceed investment in the contract (Basis), withdrawals are not taxable to the extent that they do not exceed Basis. Policy loans are free of federal income tax when taken except if the policy is or becomes a Modified Endowment Contract (MEC). If the policy is a MEC, a distribution (withdrawal or policy loan, including any increase in the policy loan balance because of unpaid loan interest) is taxable to the extent that policy value exceeds Basis. A 10% penalty tax may apply to distributions from a MEC if the policyholder is under age 59½. Basis is premium paid minus nontaxable amounts previously recovered through policy loans taken from a MEC and withdrawals. Assignment or pledge of a MEC as security for a loan would also be a taxable event. If the policy becomes a MEC, then any distribution (withdrawal or policy loan) taken in the policy year in which the policy becomes a MEC and in subsequent policy years is taxable the same as a distribution from a MEC. Any distribution taken within two years prior to the policy becoming a MEC may also be taxable the same as a MEC. Termination, other than by reason of the insured s death, of a life insurance policy with a policy loan balance may be deemed a distribution of the outstanding policy loan balance, resulting in possible adverse tax consequences for a policy that is not a MEC. Consult a tax advisor about possible tax consequences. We are not responsible for any adverse tax consequences. 3 Tax-Free Death Benefit: Generally death proceeds paid are income-tax-free to the beneficiary. Death proceeds from certain employer-owned life insurance policies may not be income-tax-free unless the requirements of section 101(j) of the Internal Revenue Code (Code) are met. All or part of death proceeds may be taxable in other circumstances as well. The circumstances include, but are not limited to, the following: (a) the policy or an interest in it has been transferred for a valuable consideration and the transfer is not to a person identified in section 101(a) of the Code, (b) the death proceeds are received under the terms of a qualified pension or profit-sharing plan, (c) the proceeds are received as alimony by a divorced spouse. 4 Surrender charges may apply. If the policy becomes a MEC, distributions, including policy loans taken in the policy year the policy becomes a MEC and in subsequent years would be taxable as described below. In addition, distributions in the preceding two policy years could become taxable. 5 Life insurance policies should be purchased based on insurance needs, not internal rates of return. The internal rate of return includes the total premiums, total distributions and net death benefit. 6 This policy is designed for maximum accumulation and solves for a minimum non-mec death benefit. In this example, the Guideline Premium Test (GPT) is used and the increasing death benefit Option 2 is illustrated, changing to a level Option 1 in the optimal year for cash accumulation. A level death benefit option is also available. 7 Genworth will send the policyowner a notice when the Overloan Protection Rider is eligible to be activated. The following conditions must be met: 1) the policyowner must provide Notice to Activate; 2) the insured must be at least age 75; 3) the policy must have been in force for at least 15 years; 4) the Loan Balance must exceed the Policy Value multiplied by the Minimum Indebtedness Percentage shown in the Schedule; 5) the Loan Balance plus the Overloan Protection Rider charge must be less than the Policy Value; 6) the Policy Value must be at least $50,000; 7) the sum of withdrawals taken before activation must equal or exceed all premiums paid; 8) the policy must not be a Modified Endowment Contract as defined in Section 7702A of the Internal Revenue Code either before or after the activation of the Rider; 9) if the policy satisfies the definition of life insurance in the Internal Revenue Code by using the Guideline Premium Requirements, following Rider activation: either the Guideline Single Premium must exceed the sum of premiums paid less non-taxable withdrawals, or the Guideline Level Premium must be greater than zero, and the sum of the Guideline Level Premiums must exceed the sum of premiums paid less non-taxable withdrawals. Asset Builder Index UL II is subject to Policy Form No. ICC14GA1011, ICC14GA1012, GA et al., GA et al. Rider Form Nos. ICC12GA109R, ICC14GA115R, ICC14GA117R, ICC14GA130E, GA109R-1212 et al., GA115R-0414 et al., GA117R-0714 et al., GA130E-0914 et al., ONE-CIR-100 et al., ONE-WP-TL et al., ONE-ADB et al. (Genworth Life & Annuity) or Policy Form No. ICC14GL1011, ICC14GL1012, GL et al., GL et al. Rider Form Nos. ICC12GL109R, ICC14GL115R, ICC14GL117R, ICC14GL130E, GL109R-1212 et al., GL115R-0414 et al., GL117R-0714 et al., GL130E-0914 et al., GE-ONE-CIR-100 et al., GE-ONE-WP-TL et al., GE-ONE-ADB et al. (Genworth Life). Although the policy value may be affected by the performance of an index, the policy is not a security and does not directly or indirectly participate in any stock, equity or similar investment including, but not limited to, any dividend payments attributable to any such investment. Market indices do not include dividends paid on the underlying stocks, and therefore do not reflect the total return of the underlying stocks. All guarantees are based on the claims-paying ability of the issuing insurance company. Important Information: Genworth wrote this content to help you understand the ideas discussed and to support our marketing of the product(s) identified in the material. Any examples are hypothetical and are used only to help you understand the ideas. They may not reflect your client(s) particular circumstances. Your clients should carefully read their contract, policy and prospectus(es), when applicable. What we say about legal or tax matters is our understanding of current law; but we are not offering legal or tax advice. Tax laws and IRS administrative positions may change. We did not write this material for use by any taxpayer to avoid any Internal Revenue Service penalty and neither you nor your clients may use it for that purpose. Your clients should ask their independent tax and legal advisors for advice based on their particular circumstances. Refer to the policy for full information about product coverage, features, benefits and limitations. This brochure provides a summary of coverage. Policy terms and provisions will prevail Genworth Financial, Inc. All rights reserved.

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