Life Insurance Boot Camp Class #2. May 22, 2007

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1

Life Insurance Boot Camp

Class #2

LANNY D. LEVIN AGENCY, Inc.

&

May 22, 2007

Some of the Subjects for Today

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

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3

Chapter I

Basic Forms of

Term Insurance

4

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

(3)

5

Annual Renewable Term Insurance With Conversion Right

CURRENT PREMIUM Year 1 $455 Year 2 $490 Year 3 $535 Year 4 $570 $500,000 DEATH BENEFIT

Year Year Year Year

1 2 3 4

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).

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

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7

GUARANTEED LEVEL TERM INSURANCE WITH CONVERSION RIGHT

Guaranteed Level Premium

$570 Year 1 Year 20 Term Period

Level Death Benefit

$1,000,000 Year 1 Year 20 Term Period 8

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.

(5)

9

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

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

(6)

11

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”

12

Decreasing Term Life Insurance With Conversion Right—little used anymore

Guaranteed Premium $350 Year 1 Year 15 Year 1 Year 15 Decreasing Death Benefit $500,000

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13

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

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

-Cum Premium 40 years: $7,756,160

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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

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

100%

16

Important Term Ins. Provisions

How long is premium guaranteed?

How long is policy renewable?

Is policy convertible or exchangable

without “Evidence?”*

*to what product?

(9)

17

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

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)

Summing Up

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19

Term Life insurance is built

for the sprint—

it is designed to expire before you do…

20

Term Life insurance is

useful—it buys time

covers a temporary need covers a

permanent need---temporarily

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21

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…)

Paying term insurance premiums is

like renting an apartment

(12)

23

Buying

whole life

insurance is

like owning

a home

24

The “Holy Grail” of term

Lifetime Term

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25

Chapter II

Whole Life Insurance

(AKA “Ordinary Life”)

Whole Life-built on a

foundation of guarantees

Guaranteed mortality rate

Guaranteed interest rate

Guaranteed expenses

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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)

28

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

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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.

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

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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.”

32

THE STRUCTURE OF

AN ORDINARY WHOLE LIFE INSURANCE POLICY

I. Guaranteed Cash Value Portion of Policy

Guaranteed cash value portion of policy

$250,000

Policy cash value will equal the $250,000 face value at age 100

Age 100 Current

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II. Pure “Mortality Portion” of Policy

$250,000

Internal mortality cost is based upon the amount at risk.

Age 100 Current

Age 40

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)

Pure life Insurance Protection (Amount at risk)

$1MM YRT vs. Whole Life, Male-34 to 74

-$20,000 -$15,000 -$10,000 -$5,000 $0 $5,000 $10,000 $15,000 $20,000 34 37 40 43 46 49 52 55 58 61 64 67 70 73 Insured's Age Annua l Pr e m iu m YRT WL

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35

Guar Cash Value

Guardian WL-99, Male 34 $1 Mill

0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000 34 38 42 46 50 54 58 62 66 70 74 78 82 86 90 94 98 Insured's Age G u a r C a s h V a lu e GCV 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

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YRT vs. WL99, Male 34, Pref NT to 90

-40,000 -20,000 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 Insured's Age Annua l Pr e m iu m

Annual Premium age 34-73

AIG Level-20 term vs. WL99, Male, Pref NT

-20,000 0 20,000 40,000 60,000 80,000 100,000 120,000 34 37 40 43 46 49 52 55 58 61 64 67 70 73 Insured's Age Annu al Pr e m iu m

(20)

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Level-20 term vs. Whole Life, Male-34 to 90

-50,000 0 50,000 100,000 150,000 200,000 250,000 34 39 44 49 54 59 64 69 74 79 84 89 Insured's Age Annu al Pr e m iu m 40

Advantages of Whole Life

Premium, cash value, and

death benefit all guaranteed

Policy can never be

“under-funded”

Pay premium/have

coverage

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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

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.

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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

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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”)

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USING DIVIDENDS TO REDUCE PREMIUMS

Net Premium After Dividend Age 40 Age 100 Using Dividends To Reduce $3,600 Premium In year 23, the projected annual dividend may be greater than the annual premium Guaranteed Cash Value Age 40 Age 100

Pure Life Insurance Protection (Amount at Risk)

$250,000

USING DIVIDENDS TO ACCUMULATE @interest (seldom used )

Guaranteed Cash Value Pure Life Insurance

Protection (Amount At Risk) Dividends used to accumulate at interest Cash Accumulation From Dividends Base Policy Annual Premium $3,600 _Age 40 Age $250,000

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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

USING DIVIDENDS TO PURCHASE SINGLE PREMIUM PAID-UP ADDITIONS

Guaranteed Cash Value Pure Life Insurance

Protection (Amount at Risk)

Cash Value Portion of Paid-Up Additions Base Policy Annual Premium $3,600 _Age 40 Age 100 Dividends used to purchase single premium paid-up life insurance Pure life insurance

portion of paid-up additions

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49 Guardian WL99, $1 MM Male 40 pref NT 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96 Insured's Age C a s h V a lu e

Guaranteed Cash Value Total Cash Value

CV of Additions Guardian WL99, $1 MM Male 40 Pref NT 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96 Insured's Age Deat h Be nef

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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

52

Disadvantages

Higher premium is paid (compared to

using dividend to reduce the premium from

the beginning)

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“Premium Offset” Using Accumulated And Future Dividends To Pay Policy Premiums

Guaranteed Cash Value Pure Life Insurance

Base Policy Annual Premium $11,740 Age 34 Age 100 Paid-Up Additions Dividend Option

Crossover year 13, when accumulated and projected dividends are used to pay subsequent premiums.

Pure Life Insurance Portion Of Paid-Up Additions (Amount at Risk) Cash Value of Paid-Up Additions $1,000,000

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)

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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

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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.

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Let’s review actual illustrations

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”

Base Policy Annual Premium $17,520 Paid-Up Additions Dividend Option

Crossover year 12, when accumulated and annual dividends are used to pay subsequent premiums. Pure Life Insurance Portion

Of Paid-Up Additions Cash Value

of Paid-Up Additions

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(Amount At Risk) Base Policy Annual Premium $17,520 Age 40 Age 100 Paid-Up Additions Dividend Option

Original crossover year 12, when accumulated and annual dividends are used to pay subsequent premiums. Pure life insurance portion

of Paid-Up Additions (Amount at Risk) Cash Value of Paid-Up Additions $1,000,000 Year 12 Crossover Year when additional premiums would be required Year 23 Additional Premium PROPOSED POLICY UNDER REVISED ASSUMPTIONS (lower dividend scale)

What if Whole Life Policy Fails To Perform In Accordance With Original Illustration ?

61

Whole Life Policy “Restored” as “natural premium offset” by paying additional years (“re-solved”)

Base Policy Annual Premium $17,520 Age 40 Age 100 Paid-Up Additions Dividend Option

Crossover year 15, when accumulated and annual dividends are used to pay subsequent premiums. Pure Life Insurance Portion

Of Paid-Up Additions Cash Value of Paid-Up Additions $1,000,000 Year 15 New Crossover Year

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Using Annual Premium Paid-up Additions Rider to Acclerate Premium Offset

(Amount At Risk) Age

40

Age 100

Crossover year 8, when accumulated and projected dividends are used to pay subsequent premiums.

Pure Life Insurance Portion Of Paid-Up Additions (Amount at Risk) Cash Value of Paid-Up Additions $1,000,000 $4,380 Annual Premium to Paid-Up Additions Rider Plus Base Policy Dividend Base Policy Annual Premium $17,520

Using a One-time Payment to Paid-up Additions Rider to Acclerate Premium Offset

Crossover year, when accumulated and projected dividends are used to pay subsequent premiums.

Pure Life Insurance Portion Of Paid-Up Additions Cash Value of Paid-Up Additions $1,000,000 Plus $xxx Lump Sum Premium Base Policy Annual Premium $17,520

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“Blending” Term +PUA

To Lower the Premium below “All-Base” Premium

(natural offset (22-pay), term ins. eliminated by age 92)

Cash Value

Age 40

Pure Life Insurance Protection

(Amount At Risk)

Cash Value Portion of Paid-Up Additions One Year Term

Life Insurance

Pure life insurance portion of paid-up additions PUA Rider Premium $454.24 Plus Base Policy Dividend Base Policy Premium $7,590 Age 100 65

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

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66

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

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%

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below-current dividend scale (1% reduction) (pay 22 years—same as current scale offset)

Cash Value

Age 40

Pure Life Insurance Protection

(Amount At Risk)

Cash Value Portion of Paid-Up Additions

One Year Term Life Insurance PUA Rider Premium $454 Plus Base Policy Dividend Base Policy Premium $7,590 Age 100 Death Benefit Declines Starting at Age 78 69

below-current dividend scale (1% reduction) POSSIBLE SOLUTIONS

1.Increase PUAR, same offset

2.Pay premium beyond 22 years

3.Monitor policy, increase PUAR

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USING Blend Term+PUA

to accelerate Premium Offset (total prem=75% of all base)

Pure One-Year Term Life Insurance Pure Life Insurance Portion of Paid-Up Additions

Cash Value of Paid-Up Additions

ADDITIONAL INSURANCE RIDER $1,000,000

Year 14, when rider values are used to pay premiums $500,000 Paid by Rider Premium of $3,720 Plus Dividend From Base Policy Base Policy Premium $7,590 Base Policy Pure Life Insurance Death Benefit (Amount at Risk)

Base Policy

Age 40 Age 100

Pure One-Year Term Life Insurance

ADDITIONAL INSURANCE RIDER

$500,000

Year 14, when accumulated and projected dividends were sufficient to pay future premiums via dividend withdrawals. $500,000 Rider Premium of $3,720 Plus Dividend From Base Policy Base Policy Premium $7,590

Pure Life Insurance Death Benefit (Amount At Risk)

Guaranteed Cash Value

Year 40, when additional premiums would be required to prevent reduction of rider face

Proposed Policy Under Revised Assumptions (1% reduction in dividend crediting rate)

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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

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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

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

Total Cash Value

Male, 40 $1,000,000 Death Benefit

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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

Year 1 1,000 1,000 Year 10 1,072 1,000 Year 20 1,377 1,227 Year 40 2,666 2,675 Male, 40 $1,000,000 Death Benefit

Total Death Benefit

Less Death Benefit with Blend

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

Tax Aspects of Whole Life-Income Tax

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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

Tax Aspects of Whole Life

80

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

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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

Riders add value to WL

Accelerated Benefit Rider

Lifetime Benefit

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

(40)

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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

84

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

(41)

85

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

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)

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87

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)

88

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

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89

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

How does a Policyholder

Access Cash?

Surrender of Paid Up Additions

Rider Adds

Surrender of Dividend Additions

Policy Loans

(44)

91

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

92

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

(45)

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

(46)

Modal Premiums

WRONG!

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?

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

(47)

Modal Premiums

WRONG!

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?

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

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99

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

PUAs are Surrendered up to Cost

Basis, then loans are taken

Benefits of Whole Life Insurance

WL

Term

Instant permanent estate

Yes

Disability “plan completion”

Yes

No

Asset (i.e. liability) protection

Yes

No

Tax-deferred growth

Yes

No

Tax-free death benefit

Yes

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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”

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103

IFL data on actual 1975 policy

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% Lanny Levin 2550018 104

IFL data on actual 1985 policy

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% Lanny Levin 2908748

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105

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

5.81%

How Do You Compare Cost of

Policies with Dissimilar

Premiums ?

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107

20 year Interest-Adjusted Surrender Cost Index

Net premiums accumulated @ 5% for 20 years 20th _{year cash value is subtracted from the}

premium accumulation “fund” (this is interest-adjusted 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

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 Premiums Cash 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

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109

How to Show Alternative Plans-Sample

WL

Min Prem Blend

Level Term

WL

Term Blend-prem equals WL

Min Prem Blend

GIO Option Ages

No. of

Options Option Option Option Option Option Option Option Option Option Option Option Option 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