SECONDARY NO-LAPSE GUARANTEE OF THE DEATH BENEFIT (SHADOW ACCOUNT GUARANTEE) No-Lapse Guarantee Illustration (Account Based Guarantee) KUGLER SYSTEM

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1 Every Day Applications for IRC Section 135 Transfers of Life Insurance The Advisors Forum July 16, 28 Teleconference Presented by Frank L. Rainaldi, CLU, ChFC, DAEP and William A. Conway, J.D. 1 SECONDARY NO-LAPSE GUARANTEE OF DEATH BENEFIT (SHADOW ACCOUNT GUARANTEE) Account Value from illustration (not guaranteed) $ No-lapse Guaranteed Shadow Account Value May Be Higher or Lower Than Policy Account Value $ 6 6 There is no lapse, even if zero cash value, and premium does not cover policy charges. 2 No-Lapse Guarantee Illustration (Account Based Guarantee) ( 4) Year Guaranteed No Lapse Non-Guaranteed Account Value Guaranteed Shadow Account Guaranteed Death Benefit $ $3, 25, 57, 13, Positive Value Vl Value Not Provided Via Illustration Positive Value $ 3

2 TAX FREE EXCHANGE UNDER IRC SECTION 135 Mr. Kugler s Old Policy $ Face Amount 15, Cash Value 1, Cost Basis Tax-Free Exchange Via IRC Section 135 Mr. Kugler s New Policy $75, Face Amount 15, Cash Transfer 1, Cost Basis 4 RESTRUCTURING PLICY LOANS PRIOR TO AN IRC SECTION 135 EXCHANGE Existing Policies $ Face Amount $6, 125, Cash Value 15, 5, Loan 1, 75, Cost Basis 75, 5 Proposed Arrangement Revised Policies (after restructuring of loan) $ Face Amount $6, 125, Cash Value 15, 75, Loan 75, 75, Cost Basis 75, 6

3 Results and Benefits Revised Policies (after termination of loan) $425, Face Amount $525, 5, Cash Value 75, Loan Cost Basis 7 Mr. Kugler s Two Existing $95, Face Amount 125, Cash Value Loan Cost Basis Tax-Free Exchange via IRC Section 135 Transfer Mr. Kugler s New Policy $1,25, Face Amount 125, Cash Transfer Loan Cost Basis 8 TAX ASPECTS OF A PARTIAL SURRENDER ON A SECTION 135 EXCHANGE WITH A BUILT-IN GAIN TO EXTINGUISH A POLICY LOAN Computing the Taxable Gain When There is a Partial Surrender on a Policy with a Built In Gain Shortly Before or Shortly After the Section 135 Exchange IRC SECTION 72 (e) IRC SECTION 131 Cash Value Before Loan $15, $15, Loan Amount 1, 1, Remaining Cash Value $5, $5, Partial Surrender $1, $1, Cost Basis (1,) Lesser of: Built-In Gain 5, Taxable Gain (Boot) $ $5,* 9

4 EXCHANGE OF AN OLDER FLEXIBLE PREMIUM POLICY FOR A SECONARY NO-LAPSE PREMIUM POLICY Existing Policy No-Lapse Guarantee Policy $255, $18, Account Value Shadow Account Value 5 $9, No Required Planned No-Lapse $ 1 REVIEW OF LIFE INSURANCE POLICY DESIGN AND AMOUNT TO DETERMINE IF Y ARE CONSISTENT WITH ESTATE OWNER S CURRENT ESTATE OBJECTIVES Existing Policy $25, 5 Account Value 7 Current Year $9,25 95 Planned 11 New Policy $1, No-Lapse Guarantee Policy $145, Shadow Account Value 7 $9,25 (Plus $25, Rollover) No-Lapse 12

5 A SECTION 135 EXCHANGE OF AN ORDINARY LIFE POLICY WITH AN ADDITIONAL INSURANCE RIDER Existing Policy Ordinary Whole Life Policy with Additional Insurance Rider Portion of Paid-Up Additions Additional Insurance Rider $5,5 One Year Term Insurance Cash Value of Additions $ Base Policy $13,5 Pure Life Ins. Protection (Amount at Risk) $285, Guaranteed Cash Values 55 7 Outlay $19, per Year 1 13 New Policy with $285, Rollover and a Secondary Death Benefit Guarantee $215, Shadow Account Value 7 Paid-Up Guarantee No-Lapse $6, 14 IMPLEMENTING AN IRC SECTION 135 TRANSFER ON A SURVIVORSHIP LIFE POLICY AFTER FIRST SPOUSE HAS DIED At Mr. Kugler s Death the Survivorship Life Policy Becomes a Single Life Policy Mr. and Mrs. K s 6 and 56 Survivorship Life Policy Owned by ILIT At Mr. K s Death Mrs. K 7 Single Life Policy Owned by ILIT Existing $12, 15

6 Exchanging the Existing Policy for a New Single Life Policy Qualifies as a Like Kind Exchange Under IRC Section 135 Mrs. K 7 Existing Policy Owned by ILIT IRC 135 Exchange $22, Cash Value Rollover Mrs. K No-Lapse New Single Life Policy Owned by ILIT $5,5 16 A SECTION 135 TRANSFER OF A NON-PARTICIPATING WHOLE LIFE POLICY TO A POLICY WITH A SECONDARY DEATH BENEFIT GUARANTEE Existing Paid-Up Non-Participating Whole Life Policy $46, Guaranteed Cash Value 5 65 No Payments Required 17 New $1,4, Policy with $465, Rollover and No Required to Guarantee the Death Benefit $1, $365, Shadow Account 65 No Payments Required 18

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