Universal Life Insurance

CQ: Universal Life mortality charge is based on:

Current attained age

CQ: A unique feature of Universal Life is

Flexible premiums

Modified Endowment Contract (MEC) Tax Warning!

MEC? -When the total premiums paid in the first 7 years exceed the guideline annual premiums (established by IRS) Withdrawals -Interest out first - taxed as ordinary income as opposed to interest out last and tax deferred with life insurance

Taxation

-Death benefit is income tax free -Cash value accumulate tac deferred in policy -Cash value surrenders: -->Cost Recovery Rule (surrenders are tax free until entire premium basis is withdrawn

Advantages

-Flexibility in premium payment -Death benefit is adjustable -Transparency of policy -Current assumptions for interest, mortality and expenses -Surrender charges -Cash value accumulates tax deferred

What creates a MEC?

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

Interest Rates

-Minimum guaranteed rate (2.75-3%) -Optional methods to establish current rate

Universal Life Indicated

-Need for ultimate flexibility -Excellent program for young family IF discipline and resources to pay adequate premiums to maintain the policy

Disadvantages

-No forced level premium payment ->Policy may lapse if premium too low and CV cannot cover mort costs -Mortality charges may increase to maximum guarantee -Interest may decrease to the minimum guarantee -Some polices provide two-tiered method of crediting interest to CV -Surrender Charges

Universal Life Basics

-Permanent life insurance -Flexible premium -Current assumptions with transparency -Adjustable death benefit

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

10

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

252

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

940

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

B

CQ: All Universal Life premiums flow first into the

Cash value account

Death Benefit Option A

Cash value increases as protection decreases

Alternatives to UL

Current assumption whole life -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 Deferred annuity plus term -Annuity CV withdrawals taxed as interest plus 10% penalty (poor option)

Death Benefit Option B

Level protection as cash value increases

CQ: Withdrawals from a MEC are taxed as:

Ordinary income plus 10% penalty