Life Insurance Boot Camp Class #2 LANNY D. LEVIN AGENCY, Inc. & 1 May 22, 2007 Some of the Subjects for Today 2 Term Insurance Whole Life Insurance How basic WL works What is a Dividend? Dividend Options & Riders How does Premium Offset work? Using term to blend for lower premium Using term to blend for higher performance Basic Tax Facts on WL Benefits of WL Tax Advantages of WL Accessing Cash from WL policies Comparing Costs of Dissimilar policies
Chapter I Basic Forms of Term Insurance 3 Construction of a Term Insurance Policy Calculate probability of death for each age Factor in cost to underwrite and maintain the policy and profit margin of the insurance company Charge the resulting annual premium each year 4
Annual Renewable Term Insurance With Conversion Right $500,000 Year 1 $455 Year 2 $490 Year 3 $535 Year 4 $570 CURRENT PREMIUM DEATH BENEFIT Year Year Year Year 1 2 3 4 5 Tax Aspects Income Tax Life insurance premiums are generally not tax deductible. Death proceeds of a life insurance policy are generally received income tax-free by a beneficiary under IRC 101 (a) (see tax chapter for transfer-for-value exception). 6 Estate Tax The death proceeds will be included in the insured s estate if insured retains any incidence of ownership in the policy (IRC section 2042). However, if the policy is owned by a family member or an irrevocable trust, the death proceeds may be excluded from the estate.
GUARANTEED LEVEL TERM INSURANCE WITH CONVERSION RIGHT $1,000,000 $570 Level Death Benefit Guaranteed Level Premium Year 1 Term Period Year 20 Year 1 Term Period Year 20 7 Mechanics of Policy Calculate mortality cost for each of the 10 years Factor in cost of underwriting and maintaining the policy Add profit margin for insurance company Determine present value of 10 years of premiums Determine level premium to fund present value over 10 years. 8
Advantages Low Guaranteed premium for limited period for temporary life insurance need Ability to pay lowest premium and convert policy later to fund permanent needs and wants 9 Conversion Option Conversion option = right to convert term policy to permanent policy without evidence of insurability Pay attention to details of conversion Type of plan How long policy can be converted Can it be converted while disabled? 10
Disadvantages No value when policy is terminated Expires or is cost-prohibitive at end of level-premium period If policy is not replaced or converted prior to end of level guaranteed premium payment period premium increases dramatically No guarantee that policy can be replaced later at another low premium 11 Decreasing Term Life Insurance With Conversion Right little used anymore $500,000 $350 Guaranteed Premium Decreasing Death Benefit Year 1 Year 15 Year 1 Year 15 12
Level-Premium Term Ins Example Initial premium $3 million face amount Male 45, Preferred non-smoker class $5,244 yearly for 20 years Then: -Ann l Premium in year 21: $126,830 -Ann l Premium in year 26: $207,830 -Ann l Premium in year 31: $352,852 -Ann l Premium in year 41: $895,250 13 20 year level Term Ins. Example Initial premium $1 million face amount Male 45, Preferred non-smoker class $5,244 yearly for 20 years -Cum Premium 20 years: $104,880 -Cash Surrender Value: Zero -Cum Premium 30 years: $2,185,760 -Cash Surrender Value: Zero -Cum Premium 40 years: $7,756,160 -Cash Surrender Value: Zero 14
15 Return of Premium Term Newer entrant in the term portfolio Returns cumulative premiums if policy is retained to end of term Higher premium than ordinary level term Must be kept to full term to recoup premiums Annual Cumulative Return of Percentage Premium Premium Premium Return 5 12,060 60,300 1,470 2% 10 12,060 120,600 20,520 17% 15 12,060 180,900 90,450 50% 20 12,060 241,200 241,200 100% Important Term Ins. Provisions How long is premium guaranteed? How long is policy renewable? Is policy convertible or exchangable without Evidence? * *to what product? Is waiver of premium included? 16
Term Riders (on Whole Life) Most popular 1. Meltaway/blend Term Riders 2. Level Term riders Guardian RTR-10 provides level convertible coverage for increasing premium for 10 years Least common 1. Decreasing Term Riders 2. Family Income Riders 17 Summing Up about Term insurance What are features of Term Insurance? Requires the lowest initial premium Provides temporary coverage Covers insured for a specific term of years Expires without value if insured survives the term Highest cost in the long run (if kept beyond the initial guarantee period) 18
Term Life insurance is built for the sprint it is designed to expire before you do 19 Term Life insurance is useful it buys time covers a temporary need covers a permanent need--- temporarily 20
Whole Life is designed for the marathon of life. It is the lowest-cost product in the long run (more about this in a little while ) 21 Paying term insurance premiums is like renting an apartment 22
Buying whole life insurance is like owning a home 23 The Holy Grail of term Lifetime Term Stay tuned 24
Chapter II Whole Life Insurance (AKA Ordinary Life ) 25 Whole Life-built on a foundation of guarantees Guaranteed mortality rate Guaranteed interest rate Guaranteed expenses 26
Pricing: The Premium is Guaranteed so it Must Be Sufficient to Pay the Following: The policy death benefit The policy surrender value The expenses of issuing and maintaining the policy An assumed profit margin for the life insurance company (contribution to surplus) 27 What is a Dividend? Policyowner s share of the company s divisible surplus Declared each year by Company s Board of Directors Dividend cannot be guaranteed or projected Dividend Scale is merely a mathematical extrapolation of what ins. co. is currently paying---not a projection or estimate 28
Typical Dividend Caveats (footnotes fine print ) Figures depending on dividends are neither estimated nor guaranteed, but are based on the 2007 dividend scale. This illustration assumes that the currently illustrated non-guaranteed elements, including dividends will continue unchanged for all years shown. This is not likely to occur and the actual results may be more or less favorable than those shown. 29 Dividends are the safety valve Dividends share the investment return (beyond the guarantee) with the policyholder Dividends share the mortality savings (beyond the guarantee) with the policyholder Dividends share the expense savings (beyond the guarantee) with the policyholder 30
31 Special Dividend Caveats for Premium Offset illustrations Policy premiums are due and payable in all years during the premium payment period. However the illustration uses the premium offset option, which uses annual dividends and/or cash value of paid-up additions to pay premiums in certain years. Depending on future dividends and other factors, more or fewer out-of-pocket premium payments may be required. See the complete illustration for details on the premium offset option. THE STRUCTURE OF AN ORDINARY WHOLE LIFE INSURANCE POLICY I. Guaranteed Cash Value Portion of Policy $250,000 Guaranteed cash value portion of policy Policy cash value will equal the $250,000 face value at age 100 Current Age 40 Age 100 32
33 II. Pure Mortality Portion of Policy Pure life Insurance Protection (Amount at risk) Current Age 40 Age 100 $250,000 Internal mortality cost is based upon the amount at risk. GUARANTEED CASH VALUE WAS NOT DESIGNED AS A SAVINGS PLAN 1. Guaranteed Cash value is the accumulation of funds to pay the eventual death claim. 2. It results in a declining amount at risk over the life of the policy 3. This reserve accumulates in the early years, when the premium is more than enough to pay the pure mortality cost 4. In the later years of the policy (after the mortality cost exceeds the premium), the income from the reserve pays the excess cost) $1MM YRT vs. Whole Life, Male-34 to 74 $20,000 $15,000 excess premium builds reserve Annual Premium $10,000 $5,000 $0 -$5,000 -$10,000 34 37 40 43 46 49 52 55 58 61 64 67 70 73 -$15,000 -$20,000 Insured's Age YRT WL 34
38 42 46 50 54 58 62 66 70 74 78 82 86 90 94 98 Guar Cash Value Guardian WL-99, Male 34 $1 Mill Guar Cash Value 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 34 Insured's Age 35 GCV 20 year level Term compared to WL99, opt B Term-20 WL99 initial ann'l prem 530 11,740 ann'l outlay-year 21 13,870 1,730 ann'l outlay-year 31 38,090 (4,570) Cumulative Outlay-20 years 10,600 145,170 Policy surrender value 0 246,620 Cumulative Outlay-25 years 97,240 148,010 Policy surrender value 0 331,330 Cumulative Outlay-30 years 238,650 135,720 Policy surrender value 0 422,470
YRT vs. WL99, Male 34, Pref NT to 90 160,000 140,000 Annual Premium 120,000 100,000 80,000 60,000 40,000 20,000 0-20,000 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88-40,000 Insured's Age 37 Annual Premium age 34-73 AIG Level-20 term vs. WL99, Male, Pref NT 120,000 Annual Premium 100,000 80,000 60,000 40,000 20,000 0 34 37 40 43 46 49 52 55 58 61 64 67 70 73-20,000 Insured's Age 38 Level-20 WL
39 44 49 79 84 89 Level-20 term vs. Whole Life, Male-34 to 90 250,000 Annual Premium 200,000 150,000 100,000 50,000 0 34-50,000 54 59 64 69 74 Insured's Age 39 Advantages of Whole Life Premium, cash value, and death benefit all guaranteed Policy can never be under-funded Pay premium/have coverage 40
Perceived Disadvantages Higher premium because of conservative assumptions Premium must be paid every year Cash value designed to equal face amount at age 100 ( endow ) Policy design very structured No flexibility in basic policy design Very limited disclosure to policy owner 41 Observations on Perceived Disadvantages Higher premium because of conservative assumptions. Absolutely true this is what gives WL its safety. Premium must be paid every year. Technically correct, but dividends and loans can be applied to premiums, permitting a skip of out-of-pocket premiums. Cash value designed to equal face amount at age 100 ( endow ). Planned policy bankruptcy is not permitted. Policy design very structured. Correct. No flexibility in basic policy design. Term riders & Paid Up addition riders give tremendous flexibility. Very limited disclosure to policy owner. Mortality charges and expenses are not laid out discretely. 42
Four Basic Dividend Options Option A - Pay the dividend in cash Option B - Apply the dividend to reduce premium Option C - dividend accumulates at interest Option D - Dividends purchases single premium paid-up life insurance addition 43 Additional Dividend Options Option F One Year Term equal to CV, balance to purchase Paid Up Adds Option G - OYT equal to CV, balance to reduce premium Option S Dividends purchase Paid Up Adds until premiums can be fully offset Option Q - Use the dividends to purchase term insurance and paid-up adds to equal a target amount of death benefit ( blending ) a number of other variations & combinations. 44
USING DIVIDENDS TO REDUCE PREMIUMS $250,000 Using Dividends To Reduce $3,600 Premium Pure Life Insurance Protection (Amount at Risk) Guaranteed Cash Value Net Premium After Dividend Age 40 Age 100 Age 40 45 Age 100 In year 23, the projected annual dividend may be greater than the annual premium USING DIVIDENDS TO ACCUMULATE @interest (seldom used ) Base Policy Annual Premium $3,600 Age 40 Pure Life Insurance Protection (Amount At Risk) Cash Accumulation From Dividends Guaranteed Cash Value $250,000 Age 100 Dividends used to accumulate at interest
Paid Up Additions Dividend Option Dividend used to purchase series of single premium paid-up life insurance policies Paid-up additional coverage has a cash value of its own Accumulating dividend values receive the same tax-deferred income tax treatment as base policy The Paid up insurance generates additional dividends which increases the total dividend paid under the policy 47 USING DIVIDENDS TO PURCHASE SINGLE PREMIUM PAID-UP ADDITIONS Base Policy Pure life insurance portion of paid-up additions Annual Premium $3,600 Age 40 Pure Life Insurance Protection (Amount at Risk) Cash Value Portion of Paid-Up Additions Guaranteed Cash Value Age 100 Dividends used to purchase single premium paid-up life insurance $250,000
92 96 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96 7,000,000 Guardian WL99, $1 MM Male 40 pref NT Cash Value 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 CV of Additions Insured's Age 49 Guaranteed Cash Value Total Cash Value Death Benefit 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 40 Guardian WL99, $1 MM Male 40 Pref NT 44 48 52 56 60 64 68 72 76 80 84 88 Face Amt of Additions Insured's Age 50 Face Amt Total DB
Advantages of PUA Div. Option Accumulation of additional cash for future use-- to pay premiums or living benefits Premium offset may be possible in the future Dividend accumulations not subject to income tax Higher future dividend because of the dividend on the dividend Automatic increases in death benefit each year without evidence of insurability 51 Disadvantages Higher premium is paid (compared to using dividend to reduce the premium from the beginning) 52
Premium Offset Using Accumulated And Future Dividends To Pay Policy Premiums Paid-Up Additions Dividend Option Base Policy Annual Premium $11,740 Pure Life Insurance Portion Of Paid-Up Additions (Amount at Risk) Cash Value of Paid-Up Additions Pure Life Insurance Guaranteed Cash Value Crossover year 13, when accumulated and projected dividends are used to pay subsequent premiums. $1,000,000 53 Age 34 Age 100 Payment of Premium At Beginning of Year 13 Premium Due 11,740 Dividend Payable (7,338) Net Premium Payable 4,402 Partial Surrender of Cash Portion of Paid-Up Dividend Accumulations (4,402) For Subsequent Years Follow The Same Procedure 54
Advantages If dividends are paid, there is no out of pocket premium payable at some point Dividends accumulated as paid-up additions will increase the total death benefit 55 56 Caveats* Results are sensitive to actual dividends paid Dividends may not be paid as illustrated, delaying the premium offset Policy must be closely monitored NOTE: AN OFFSET POLICY IS NOT PAID UP and out-of-pocket premiums may be payable in future years if dividends are insufficient. *these facts must be communciated to buyer
Let s review actual illustrations 58 1. Note the first year there is any Cash Value 2. Note the year the Increase in Total Cash Value exceeds the annual premium 3. Note the year the increase in Guaranteed Cash Value exceeds the annual premium 4. Note the year the total cumulative cash value exceeds the cumulative premiums 5. Note the year the annual dividend and future dividends is anticipated to be sufficient to pay all future premiums (#2 only) Whole Life Policy Illustrated as natural premium offset Paid-Up Additions Dividend Option Base Policy Annual Premium $17,520 Pure Life Insurance Portion Of Paid-Up Additions Pure Life Insurance Cash Value of Paid-Up Additions Guaranteed Cash Value Crossover year 12, when accumulated and annual dividends are used to pay subsequent premiums. $1,000,000 59 Age 40 Year 12 Crossover Year Age 100
Paid-Up Additions Dividend Option Base Policy Annual Premium $17,520 What if Whole Life Policy Fails To Perform In Accordance With Original Illustration? PROPOSED POLICY UNDER REVISED ASSUMPTIONS (lower dividend scale) Pure life insurance portion of Paid-Up Additions (Amount at Risk) Pure Life Insurance (Amount At Risk) Cash Value of Paid-Up Additions Guaranteed Cash Value Original crossover year 12, when accumulated and annual dividends are used to pay subsequent premiums. Year when additional premiums would be required $1,000,000 60 Age 40 Year 12 Crossover Year 23 Additional Premium Age 100 Whole Life Policy Restored as natural premium offset by paying additional years ( re-solved ) Paid-Up Additions Dividend Option Base Policy Annual Premium $17,520 Pure Life Insurance Portion Of Paid-Up Additions Pure Life Insurance Cash Value of Paid-Up Additions Guaranteed Cash Value Crossover year 15, when accumulated and annual dividends are used to pay subsequent premiums. $1,000,000 61 Age 40 Year 15 New Crossover Year Age 100
Using Annual Premium Paid-up Additions Rider to Acclerate Premium Offset $4,380 Annual Premium to Paid-Up Additions Rider Plus Base Policy Dividend Base Policy Annual Premium $17,520 62 Age 40 Pure Life Insurance Portion Of Paid-Up Additions (Amount at Risk) Cash Value of Paid-Up Additions Pure Life Insurance (Amount At Risk) Guaranteed Cash Value Crossover year 8, when accumulated and projected dividends are used to pay subsequent premiums. Age 100 $1,000,000 Using a One-time Payment to Paid-up Additions Rider to Acclerate Premium Offset Pure Life Insurance Portion Of Paid-Up Additions Crossover year, when accumulated and projected dividends are used to pay subsequent premiums. Plus $xxx Lump Sum Premium Base Policy Annual Premium $17,520 Pure Life Insurance Cash Value of Paid-Up Additions Guaranteed Cash Value $1,000,000 63 Age 40 Age 100
Blending Term +PUA To Lower the Premium below All-Base Premium (natural offset (22-pay), term ins. eliminated by age 92) Pure life insurance portion of paid-up additions PUA Rider Premium $454.24 Plus Base Policy Dividend Base Policy Premium $7,590 One Year Term Life Insurance Pure Life Insurance Protection (Amount At Risk) Cash Value Portion of Paid-Up Additions Cash Value Age 40 Age 100 64 Advantages of Blended Term Insurance Rider Provides some premium flexibility Policy owner determines rider premium More economical (lower expenses) method of providing increased death benefit 65
Disadvantages of Blended Term Insurance Rider The smaller the PUAR contribution, the more closely the policy must be monitored because policy will be more sensitive to dividends i.e. If policy dividend scale is reduced the contribution to the rider may need to be increased 66 History of Interest Rate Component of Guardian Dividend Scale Year Rate Year Rate Year Rate Year Rate 1970 4.00% 1980 7.05% 1990 11.00% 2000 8.50% 1971 4.00% 1981 7.20% 1991 10.50% 2001 8.50% 1972 4.50% 1982 7.50% 1992 10.25% 2002 8.00% 1973 4.65% 1983 7.65% 1993 9.75% 2003 7.00% 1974 4.90% 1984 12.25% 1994 9.00% 2004 6.60% 1975 5.15% 1985 13.25% 1995 8.50% 2005 6.75% 1976 5.45% 1986 13.25% 1996 8.00% 2006 6.50% 1977 6.10% 1987 12.50% 1997 8.50% 2007 6.75% 1978 6.35% 1988 12.00% 1998 8.75% 1979 6.50% 1989 11.50% 1999 8.75%
Blending Term +PUA To Lower the Premium below All-Base Premium below-current dividend scale (1% reduction) (pay 22 years same as current scale offset) PUA Rider Premium $454 Plus Base Policy Dividend Base Policy Premium $7,590 One Year Term Life Insurance Pure Life Insurance Protection (Amount At Risk) Cash Value Portion of Paid-Up Additions Cash Value Death Benefit Declines Starting at Age 78 68 Age 40 Age 100 Blending Term +PUA To Lower the Premium below All-Base Premium below-current dividend scale (1% reduction) POSSIBLE SOLUTIONS 1.Increase PUAR, same offset 2.Pay premium beyond 22 years 69 3.Monitor policy, increase PUAR later
USING Blend Term+PUA to accelerate Premium Offset (total prem=75% of all base) ADDITIONAL INSURANCE RIDER $1,000,000 Paid by Rider Premium of $3,720 Plus Dividend From Base Policy Pure One-Year Term Life Insurance Pure Life Insurance Portion of Paid-Up Additions Cash Value of Paid-Up Additions Base Policy Year 14, when rider values are used to pay premiums $500,000 Base Policy Premium $7,590 Pure Life Insurance Death Benefit (Amount at Risk) Base Policy 70 Age 40 Age 100 Rider Premium of $3,720 Plus Dividend From Base Policy Base Policy Premium $7,590 Proposed Policy Under Revised Assumptions (1% reduction in dividend crediting rate) ADDITIONAL INSURANCE RIDER Pure One-Year Term Life Insurance Pure Life Insurance Death Benefit (Amount At Risk) $500,000 Year 14, when accumulated and projected dividends were sufficient to pay future premiums via dividend withdrawals. $500,000 Guaranteed Cash Value Year 40, when additional premiums would be required to prevent reduction of rider face 72 Age 40 Year 14 Crossover Year 40 Age 100 Rider declines
USING Blend Term+PUA to Turbo-Charge a Whole Life plan Reduce face amount (& base premium) by 25-50% Add back term rider to restore full death benefit Add back PUAR premium to restore full WL premium Result #1: higher & earlier cash value Result #2: higher long-run death benefit Result #3: lower commissions 75 76 More & Earlier Cash with Blend Male, 40 $1,000,000 Death Benefit 100% 50% Whole Life Whole Life Annual Premium 15,080 15,080 Natural Prem Offset 13 9 Term "burns off" not. Applic. Year 44 If Premiums are paid without Offset Total Cash Value Year 1 0 7,062 Year 10 142,436 165,556 Year 20 481,355 509,090 Year 40 1,958,138 2,062,853
Less Death Benefit with Blend Male, 40 $1,000,000 Death Benefit 100% 50% Whole Life Whole Life Annual Premium 15,080 15,080 Natural Prem Offset 13 13 Term "burns off" not. Applic. year XX If Premiums are paid without Offset 77 Total Death Benefit Year 1 1,000 1,000 Year 10 1,072 1,000 Year 20 1,377 1,227 Year 40 2,666 2,675 Tax Aspects of Whole Life-Income Tax (Assuming policy is not a MEC) Life insurance premiums are generally not tax deductible. Death proceeds of a life insurance policy are generally received income tax-free by a beneficiary under IRC 101 (a) (Transfer-for-Value is an exception.) Cash values accumulate without current income tax Upon termination of policy, cash value in excess of premiums paid is taxable as ordinary income Loans are not generally taxable even if they exceed cumulative premiums Annual Dividends are tax free until They are received AND 78 They cumulatively exceed cumulative premiums
Tax Aspects of Whole Life Estate & Gift Tax The death proceeds will be included in the insured s estate if insured retains any incidence of ownership in the policy (IRC section 2042). The death proceeds may be excluded from the estate if the policy is owned by a family member or an irrevocable trust. Premiums paid by someone other than the policyowner are gifts, and may be taxable. Gifts to trusts are gifts of future interests, not eligible for annual gift tax exclusion unless structured properly 79 Riders add value to WL Disability Waiver of Premium Rider Accelerated Benefit Rider Guaranteed Purchase Option Rider (Guaranteed Insurability Option Rider) Paid Up Additions Rider Term riders (Details on following slides) 80
Riders add value to WL Disability Waiver of Premium Rider Premiums are waived if insured is totally disabled This is plan completion insurance Package it in Especially valuable for clients who are maxed out for personal DI coverage Be sure you know the definition of total disability 81 Riders add value to WL Lifetime Benefit Accelerated Benefit Rider Provides access to monies beyond the loan value prior to death Interest Bearing Lien against Death Proceeds Base policy + PU Additions not term rider Understand the triggers Various percentages of amount at risk available (always 80% for Terminal illness), subject to IRS maximum annual lien amounts 82
Guardian EABR s Triggers Chronic Illness Permanently unable to perform 2 of 6 ADLs (ADLs: Eating,Bathing,Continence,Dressing, Toileting,Transferring) OR requires substantial supervision from another person to protect from threats to health & safety due to severe & permanent cognitive impairment Terminal Illness Illness or condition that can be expected to result in death within 12 months 83 Riders add value to WL Guaranteed Purchase Option Guarantees additional permanent life insurance at various ages Guardian Maximum: $250,000 each option date Guardian: up to 8 options, possible ages: 25,28,31,34,37,40,43,46,49,52,55 Accelerated dates: marriage, birth or adoption of child/g dchild, child enrolls in college,20% incr in insured s compensation No evidence of insurability Company notifies insured and agent Hint: Package this into every WL policy 84
Riders add value to term ins! Whole Life Purchase Option (Guardian Level Term) Guarantees additional permanent life insurance at various ages Maximum: $250,000 each option date Younger ages: 25.28,31,34,37,40,43,46 Older ages: 3-5 options, even up to option age 58 Accelerated dates: marriage, birth or adoption of child,purchase of home, enrollment of child in college, at least 20% increase of compensation No evidence of insurability 85 86 Riders add value to WL Paid Up Additions Rider Rider purchases additional paid up insurance Uses of Rider Fortify or capitalize a term blend Overfund a policy beyond the base premium Simply accumulate additional CV and DB Payments into the rider Scheduled (fixed amount billed modally) Unscheduled (unbilled amounts can be dumped in on or off-policy anniversary) Scheduled amts can be protected by disability waiver of premium Rider Limits Minimum $100 yearly Maximum initially: greater of $1 MM or 10X base premium (+1035 exceptions) Lesser of 3X base prem or $200,000 yearly (first 10 yrs) Lesser of 1X base prem or $200,000 yearly (after 10 yrs)
Riders add value to WL Term Riders Primary term rider is Q-Term Term designed to melt away or burn off as paid-up insurance increases. e. g. $100 dollar increase in face amount of PUA=$100 decrease in term Other Term riders available from some companies Level term for limited period Spousal or children term riders Decreasing term riders (scheduled decreases) 87 Benefits of Whole Life Insurance Instant permanent estate Disability plan completion possible Asset (i.e. liability) protection (state law) Tax-deferred growth Income tax-free death benefit Private will-substitute Financial leveraging of small annual gift Tax leveraging of small annual gift 88
Tax Advantages of WL (Also applicable to UL) Income Tax Free Death Benefits Tax-deferred buildup of cash values Access to policy cash values on a tax-favored basis 1. Withdrawal of dividends-fifo 2. Policy loans do not trigger gain 89 How does a Policyholder Access Cash? Surrender of Paid Up Additions Rider Adds Surrender of Dividend Additions Policy Loans 90
Policy Loans Policy owner can borrow from insurance company no questions asked about credit Collateral for loan is policy s cash surrender value Loan interest rate is either: Fixed rate ( direct recognition ) Variable rate (pegged to an index) Fixed rate without direct recognition 91 Guardian Policy Loans Guardian s policies: fixed rate ( direct recognition ) 8% in advance until later of age 65 or 20 years 5% thereafter Loan spread (Difference between loan rate charged and interest credited in dividend) 1.00 % for first 20 years 0.50 % year 21 to age 59 0.10 % age 60 & older Loan rates are contractual Loan spreads are subject to change 92
Modal Premiums 10,000 Sample Premium 0.515 Typical Semi-annual premium factor 5,150 Semi-Annual Premium 10,300 Total Premium paid (2 x Semi-Annual) 3.00% interest, right? WRONG! True Cost of Modal Premium $ 300 "interest" $ 4,850 Amount "Borrowed" 0.50 Term of the "loan" 6.19% interest divided by amount borrowed 12.37% true interest rate
Modal Premiums 10,000 Sample Premium 0.085833 Typical Check-o-matic monthly factor 858.33 Check-o-matic monthly premium 10,300 Total Premium paid (2 x Semi-Annual) 3.00% interest, right? WRONG! True Cost of Modal Premium $ 858.33 Monthly Payment 12 Number of periods 10,000 Present Value 0.54% Actual interest rate per period 6.50% Actual APR
Modal Premiums 10,000 Sample Premium 0.262650 Typical Quarterly premium factor 2,626.50 Quarterly Premium 10,506 Total Premium paid (4 x quarterly prem) 5.06% interest, right? WRONG! True Cost of Modal Premium $ 2,626.50 Quarterly Payment 4 Number of periods 10,000 Present Value 3.39% Actual interest rate per period 13.57% Actual APR
WL s Power of Accumulation Premiums Paid to age 65, then distributions Male 30 no PUA Male 30 maximum PUA Male 45 no PUA Male 45 maximum PUA 99 PUAs are Surrendered up to Cost Basis, then loans are taken Benefits of Whole Life Insurance WL Term Instant permanent estate Yes Yes Disability plan completion Yes No Asset (i.e. liability) protection Yes No Tax-deferred growth Yes No Tax-free death benefit Yes Yes Private will-substitute Yes Yes
101 Personal Uses for Whole Life Human Life value replacement Protection for long-term liabilities (including revolving/changing liabilities) Power/permission to consume other assets Pension maximization Asset replacement for charitable gifts Cash accumulation for long-term purposes 1. Systematic 2. Self-completing at death or disability 3. Safe 4. Tax-Sheltered Reality Life Insurance 1975 policy 1984 policy Muni-Bond with a life insurance coupon 102
IFL data on actual 1975 policy Lanny Levin 2550018 1 2 3 4 5 Pol. Annual Cumul. EOY EOY Cash on Yr. Year Cal Yr Premium Premium Cash Val DeathBen Cash ROI Rate of Retn 1 33 2007 382 12,606 41,546 67,575 2 34 2008 382 12,988 44,342 70,395 5.81% 3 35 2009 382 13,370 47,285 73,348 5.78% 4 36 2010 382 13,752 50,380 76,438 5.74% 5 37 2011 382 14,134 53,635 79,674 5.70% 6 38 2012 382 14,516 57,058 83,061 5.67% 103 IFL data on actual 1985 policy Lanny Levin 2908748 1 2 3 4 5 Pol. Annual Cumul. EOY EOY Cash on Yr. Year Cal Yr Premium Premium Cash Val DeathBen Cash ROI Rate of Retn 1 24 2007 386 9,264 14,803 34,463 2 25 2008 386 9,650 15,917 35,410 4.92% 3 26 2009 386 10,036 17,077 36,390 4.86% 4 27 2010 386 10,422 18,295 37,418 4.87% 5 28 2011 386 10,808 19,572 38,502 4.87% 104
How to Calculate Yr to Yr Rate of Return-1975 policy 44,342 EOY CV-this yr. -41,546 EOY CV-last yr. 2,796 increase in CV -382 less prem.paid 2,414 return on last yr CV 105 5.81% How Do You Compare Cost of Policies with Dissimilar Premiums? (Illustrated or Historical costs) 106
20 year Interest-Adjusted Surrender Cost Index Net premiums accumulated @ 5% for 20 years 20 th year cash value is subtracted from the premium accumulation fund (this is interestadjusted net cost of the insurance) Determine the amount of money required to accumulate each year at 5% to equal the net cost of insurance. This is done by dividing the net cost by the factor for $1.00 yearly payment for 20 years at 5% interest The result is the Interest-Adjusted Surrender Cost Index The lower the better 107 Negative is better than positive 108 Actual Interest Adjusted Costs 1980-2000 1 2 3 4 5 Interest- Interest- Additional 20 years' Adjusted Adjusted Cost Net PremiumsCash Value Net Cost Net Cost Compared to Accumulated End of $50,000 $1,000,000 GUARDIAN @ 5.0% 20th year Face amountface amount* $1 Mill Face AmerUs Life 18,555 20,009 (1,454) (29,078) $ (4,285) Conn. Mutual 17,999 14,255 3,745 74,892 $ 99,686 Country Life 17,869 15,865 2,005 40,095 $ 64,889 Equitable Life 21,034 18,512 2,522 50,438 $ 75,232 Gen.Amer. 18,150 16,525 1,625 32,503 $ 57,297 Guardian 15,033 16,273 (1,240) (24,793) $ - John Hancock 20,160 18,165 1,995 39,900 $ 64,693 ManuLife Fin'l 16,419 14,850 1,569 31,384 $ 56,178 Mass. Mutual 17,277 15,974 1,303 26,063 $ 50,857 Metropolitan 21,676 16,750 4,926 98,520 $ 123,313 Mutual of N.Y. 20,776 20,600 176 3,515 $ 28,308
How to Show Alternative Plans-Sample WL Min Prem Blend Level Term WL Term Blend-prem equals WL Min Prem Blend 109 GIO Option Ages Option Ages for Various Policy Issue Ages No. of Options Option Option Option Option Option Option Option Option Option Option Option Option 110 under 25 8 25 28 31 34 37 40 43 46 25 7 28 31 34 37 40 43 46 26 7 28 31 34 37 40 43 46 27 7 28 31 34 37 40 43 46 28 6 31 34 37 40 43 46 29 6 31 34 37 40 43 46 30 6 31 34 37 40 43 46 31 5 34 37 40 43 46 32 5 34 37 40 43 46 33 5 34 37 40 43 46 34 5 37 40 43 46 49 35 5 37 40 43 46 49 36 5 37 40 43 46 49 37 5 40 43 46 49 52 38 5 40 43 46 49 52 39 5 40 43 46 49 52 40 5 43 46 49 52 55 41 5 43 46 49 52 55 42 5 43 46 49 52 55 43 5 46 49 52 55 58 44 5 46 49 52 55 58 45 5 46 49 52 55 58 46 4 49 52 55 58 47 4 49 52 55 58 48 4 49 52 55 58 49 3 52 55 58 50 3 52 55 58