Universal Life Insurance

Alternatives to UL

-Current assumption whole life -variable life -Deferred annuity plus term

current assumption whole life insurance

Current interest and mortality but limited or no flexibility in premium and death benefit

variable life

Offers more investment options for CV but greater expense loads

In what year is the surrender charge 0? (See PowerPoint chart)

year 10

A New Generation of Life Insurance

-LI with bundled protection and investment -Tax deferred cash accumulation -Tax free death benefit

What Creates a Modified Endowment?

-increase in premium payments -reduction in death benefit -withdrawal of CV may trigger a conversion to MEC **To avoid MEC, excess premiums may be returned to policy holder with interest within 60 days following policy anniversary

What is surrender charge at year 1? (See PowerPoint chart)

=cash value-surrender charge 1749-809=940

What fees (mortality and expense) have been deducted from CV in year 1? (See PowerPoint chart)

=yearly premium-cash value 2001-1749=252

Deferred annuity plus term

Annuity CV withdrawals prior too age 591/2 taxed as interest plus 10% penalty (poor option)

Is the policy death benefit option A or B? (See PowerPoint chart)

B- increasing death benefit

Advantages

Flexibility in premium payment -To avoid lapse, must maintain adequate CV to cover annual mortality cost Death benefit is adjustable -Changes after policy inception are subject to insurability -Option A (level) or B (increasing) Transparency of policy elements -Current interest, mortality and expense displayed in annual policy summary Current assumptions for interest, mortality and expenses

How to Compare Universal Life Policies

Front end expense loads Current and guaranteed interest Current and maximum mortality rates Surrender charges ***Best short cut is to compare current cash values for first five years

option A

Level death benefit -Cash value increases as protection decreases

When is UL Indicated?

Need for ultimate flexibility -premium payments can be adjusted or skipped -death benefit can be adjusted -Excellent program for young family IF discipline and resources to pay adequate premiums to maintain the policy -Low initial premium -High death benefit -Potential cash value accumulation

Disadvantages

No forced level premium payment: -Policy may lapse if premium payments are too low and CV not adequate to cover current mortality cost Premiums may increase in the future to cover future mortality costs and to avoid policy lapse

Withdrawals from a MEC are taxed as:

Ordinary income plus 10% penalty

What is Universal Life?

Permanent life insurance -cash and loan values Flexible premium -Adjust or skip premium Current assumptions with transparency -Interest, mortality, expense Adjustable death benefit -Option A or B

What is a Modified Endowment Contract (MEC) ?

When total premiums paid during first 7 years exceeds the sum of the guideline annual premiums (maximum actuarial premiums established by IRS based on insured's age and policy death benefit)

All UL premiums flow first into the

cash value account

UL mortality charge is based on

current age

a difference between UL and WL is:

flexible premiums

Withdrawals from a MEC are taxed as follows:

if a policy is classified as a MEC, distributions under the contract are taxed under the interest-first rule,rather than the cost-recovery rule. Also, subject to a 10% penalty on interest distributions if they occur prior to the policy owner turning 59 1/2

option b

increasing death benefit -Level protection as cash value increases