Understanding Indexed Universal Life Insurance A General Educational Overview

Transcription

1 Understanding Indexed Universal Life Insurance The Power To Help You Succeed Steve Guerra Field Vice President Greater Texas RLO Pacific Life Insurance Company 24 Waterway Avenue, Suite 825 The Woodlands, TX Understanding Indexed Universal Life Insurance A General Educational Overview September 2010 MKTG OC Hour CE Credit 3 of 26

2 Indexed Universal Life (IUL)* Variable Universal Life (VUL) ATTRACTIVE FEATURES ATTRACTIVE FEATURES ATTRACTIVE FEATURES Declared Interest Rate Credited Interest Based in Part on the Performance of Major Index Greater Growth Potential Universal Life (UL) Accumulated Value Not Subject to Market Fluctuations Minimal Allocation Decisions Tax Benefits Guaranteed Minimum Interest POTENTIAL CONCERNS Tax Benefits Declining Interest Rates POTENTIAL CONCERNS Inflation Must Wait Until End of Term to Receive Credits Investment Options Tax Benefits POTENTIAL CONCERNS Accumulated Value Subject to Market Fluctuations Many Allocation Decisions *IUL does not directly participate in any stock or equities markets For Insurance Professional Use Only. Not for Use with the Public. 4 of 26 1st IUL policies issued in 1997 Continues to gain momentum For Insurance Professional Use Only. Not for Use with the Public. 5 of 26 How does an insurance company offer a policy that has upside potential similar to stock market type gains without passing risk to policyowners? Investing premiums in fixed interest investments Call options Source: Understanding Equity-Indexed Universal Life, April 2008, Advisor Today, For Insurance Professional Use Only. Not for Use with the Public. For Insurance Professional Use Only. Not for Use with the Public. 6 of 26

3 *Any policy withdrawals, loans, and loan interest will reduce policy values and may reduce death benefits" on the slide. 7 of 26 8 of 26 Reallocation from Indexed (s) 9 of 26

4 10 of 26 Ensures minimum return Limits marketbased losses Floor / Guaranteed Minimum Interest Rate 11 of 26 *According to a schedule the carrier sets 12 of 26

5 Growth Cap Growth Rate subject to Credited Rate (applied at Segment Maturity) Floor 13 of 26 IUL Growth Potential Index driven driven Interest Crediting 14 of 26 Fixed : Receives interest credits up to date of deduction More liquid than Indexed Segments Fixed Taking deductions from Fixed : Maximize growth potential in Indexed s Indexed Indexed Indexed If deductions taken from Indexed (s): Maturing Segments may forfeit interest Reallocation of maturing Segments to other accounts may be restricted 15 of 26

6 Policy loans* Borrow money from accumulated value using policy as collateral Withdrawals* Taking portion of policy s accumulated value Transfers and Reallocations To Tailor Growth Strategy * If the Fixed does not have sufficient funds to process a policy loan, withdrawal or other deductions, they will be taken from the Indexed s, which may result in forfeiture of interest crediting and policy lockout. Tax-free income assumes, among other things: (1) withdrawals do not exceed tax basis (generally, premiums paid less prior withdrawals); (2) policy remains in force until death; (3) withdrawals taken during the first 15 policy years do not occur at the time of, or during the two years prior to, any reduction in benefits; and (4) the policy does not become a modified endowment contract. See IRC Sections 7702(f)(7)(B), 7702A. Any policy withdrawals, loans and loan interest will reduce policy values and may reduce benefits. 16 of 26 Fixed to an Indexed Each transfer creates a Segment 17 of Average Return 16.06% Average Return 0.22% Source: Figures are based on actual S&P 500 returns, Bloomberg One year figures are based on the change in the S&P 500 beginning on 12/15 and ending 12 months later on 12/15 of the year shown. 18 of 26

7 1 Year Indexed 11% Current Growth Cap 3% Guaranteed Growth Cap 100% Guaranteed Participation Rate 0% minimum Guarantee Interest Rate 19 of 26 Index Growth Rate Participation Rate Growth Rate Subject to a Growth Cap & Floor 20 of 26 11% Growth Cap Index Growth Rate 40.50% Participation Rate 100% 40.50% Growth rate subject to 0% credited at end of Segment s 1 Year Maturity Date 0% Floor *In PA, the 1 Year Indexed has a 11% current Cap (3% guaranteed), 1% guaranteed Floor, and 100% Participation Rate. In NY, the 1 Year Indexed has a 12% current Cap (3% guaranteed), 0% guaranteed Floor, and 100% guaranteed Participation Rate. 21 of 26

8 Death benefit provides self fulfilling funding in case of death Protection against negative returns Carrier absorbs investment risks Potential for higher crediting rates Ability to create a tax free* income stream Potential return of premium Potential lifetime coverage without paying for a lifetime guarantee Source: Chris Conklin, 8 Reasons To Use Index Universal Life To Save for Retirement", April 23, 2010, *For federal income tax purposes, life insurance death benefits generally pay income tax free to beneficiaries pursuant to IRC Section 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Section 101(a)(2)( i.e. the transfer for value rule ); arrangements that lack an insurable interest based on state law; and an employer owned policy unless the policy qualifies for an exception under IRC Section 101(j). **Tax free income assumes, among other things: (1) withdrawals do not exceed tax basis (generally, premiums paid less prior withdrawals); (2) policy remains in force until death; (3) withdrawals taken during the first 15 policy years do not occur at the time of, or during the two years prior to, any reduction in benefits; and (4) the policy does not become a modified endowment contract. See IRC Sections 7702(f)(7)(B), 7702A. Any policy withdrawals, loans and loan interest will reduce policy values and may reduce benefits. 22 of 26 Executive Compensation Retirement Strategies Premium Financing Estate Planning General 401(k) Mirror Plans Executive Bonus Key Person Non Qualified Plans Retirement Planning Roth IRA Alternative s Receivable Financing Life Insurance Premium Financing Charitable Gifts Maximizing IRA Assets to Heirs Wealth Transfer Strategies Life Insurance Policy Review How Business Owners Can Get the Most Out of Their Business Life Insurance Needs 23 of 26 Fixed An account within the policy into which net premiums are first applied and which provides a guaranteed minimum annual crediting rate. Growth Cap The maximum total interest rate for a Segment over the Segment Term, including both the Segment Guaranteed Interest Rate and the Segment Indexed Interest Rate. Segment Indexed Interest Credited at Segment Maturity, it is equal to the Segment Indexed Interest Rate multiplied by the average of all Segment Monthly Balances over the entire Segment Term. Indexed The account into which the policyowner would transfer some or all of the policy s accumulated value from the Fixed and earns an annual crediting rate based on Segment Indexed Interest. 24 of 26

9 Index Growth Rate In calculating the Segment Indexed Interest, the Index Growth Rate for the Segment Term is calculated first. Depending on the Indexed, the rate is determined using the Index returns over a certain time period. Lockout Period If a deduction from an Indexed occurs as a result of a loan or withdrawal that is not part of a systematic distribution, then the Lockout period applies to the policy. Participation Rate The percentage of the Index Growth Rate that is used in calculating the Segment Indexed Interest Rate. Segment Each transfer into an Indexed creates a Segment, which earns interest based on the Segment Indexed Interest Rate applied at Segment Maturity. Segment Indexed Interest Rate Reflects any growth in the Index, subject to the Growth Cap, that exceeds the Cumulative Segment Guaranteed Interest Rate. 25 of 26 Segment Guaranteed Interest Rate The minimum guaranteed interest rate compounded annually for the number of years of the Segment Term. Segment Maturity The date at the end of a Segment Term on which the Indexed Interest Credit is applied and the Segment Maturity Value is either reallocated to a new Indexed Segment or to the Fixed. Segment Maturity Value The sum of a Segment s value plus the Indexed Interest Credit applied at maturity. All Segment Maturity Value is automatically reallocated back into the same Indexed in the form of new Segment, unless instructions from the client direct reallocation into another account. Segment Monthly Balance The Segment Monthly Balance is, as of the end of any Segment Month, the amount initially transferred to the Segment on the Segment Date minus all Segment Deductions, excluding any interest that may have been credited to the Segment. 26 of 26 Pacific Life Insurance Company Newport Beach, CA (800) Pacific Life & Annuity Company Newport Beach, CA (888) This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its distributors and their respective representatives do not provide tax, accounting or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. Pacific Life refers to Pacific Life Insurance Company, and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York, and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each company is solely responsible for the financial obligations accruing under the products it issues, and its product and rider guarantees are backed by that company s financial strength and claims paying ability. Some selling entities, which may include bank affiliated entities, may limit availability of some optional riders based on their client s age and other factors. Your broker dealer can help you determine which optional riders are available and appropriate for your clients. Non guaranteed elements are not guaranteed by definition. As such, Pacific Life reserves the right to change or modify any non guaranteed element. This right to change non guaranteed elements is not limited to a specific time or reason. Pacific Life s individual life insurance products are marketed exclusively through independent third party insurance professionals, which may include bank affiliated entities. "Standard & Poor's ", "S&P ", "S&P 500 ", "Standard & Poor's 500", and "500" are trademarks of Standard & Poor s Financial Services LLC and have been licensed for use by Pacific Life. The Product is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the Product. Investment and Insurance Products: Not a Deposit Not FDIC Insured Not Insured by any Federal Government Agency No Bank Guarantee May Lose Value MKTG OC of 26