Ordinary Level Premium Whole Life Insurance

1. Ordinary Level Premium Whole Life Insurance Chapter 13 Tools & Techniques of Life Insurance Planning • Characteristics • Provides protection for the entire lifetime • Level or fixed periodic premiums payable for the lifetime of the insured • Level and fixed death benefit • Fixed schedule of guaranteed cash surrender values that increase of a period of time • These cash value can be borrowed by the policyowner at any time

2. Ordinary Level Premium Whole Life Insurance Chapter 13 Tools & Techniques of Life Insurance Planning • When is the use of this tool indicated? • Provide income for dependant family members • Liquidate consumer or business debts or mortgages • Fund college education • Cash for federal and estate tax needs • Fund a business continuation agreement • Key employee coverage • Help recruit, retain and reward key employees through a salary continuation plan

3. Ordinary Level Premium Whole Life Insurance Chapter 13 Tools & Techniques of Life Insurance Planning • When is the use of this tool indicated? (cont'd) • For split dollar agreement • Fund bequests of capital to children, grandchildren • Fund charitable bequests • Preserve confidentiality of financial affairs • Assure nearly instant access of cash for surviving dependants • Direct family assets to family members in a tax efficient manner • When the need is long term and there is a desire for a level fixed premium • Financing post-retirement health insurance for select executives

4. Ordinary Level Premium Whole Life Insurance Chapter 13 Tools & Techniques of Life Insurance Planning • Advantages • Fixed and known premium • Guaranteed ceiling on mortality and expense charges • Guaranteed floor on interest credited to cash values • Cash values grow income-tax deferred • Frequently pays a higher effective interest rate than tax free municipal bonds • Through a combination of guaranteed cash values and dividends • Cash values not subject to same market risk as longer term municipal bonds and other long-term fixed investments • Cash values can be borrowed at low net cost • Proceeds not typically part of the probate estate

5. Ordinary Level Premium Whole Life Insurance Chapter 13 Tools & Techniques of Life Insurance Planning • Advantages (cont'd) • Proceeds not typically part of the probate estate • No public record of death benefit amount nor to whom it is paid • Proceeds are generally not subject to federal estate taxation • Life insurance policies can be used as collateral for a loan • Disadvantages • Premiums may be unaffordable • Higher cost than term for the same coverage, in the early years • Term may be ultimately more expensive later on

6. Ordinary Level Premium Whole Life Insurance Chapter 13 Tools & Techniques of Life Insurance Planning • Disadvantages (cont'd) • Significant surrender charges in the early years • Interest on policy loans is generally not tax deductible • Limited hedge against inflation with guaranteed cash value • Dividends (Non-guaranteed) will help • Rate of return on cash value is not favorable as compared to other alternative investments

7. Ordinary Level Premium Whole Life Insurance Chapter 13 Tools & Techniques of Life Insurance Planning • Tax Implications • General tax rules • Death benefits income tax free • Death benefits subject to same income, estate, gift and generation skipping transfer taxation rules as all other types of life insurance • Taxation of living proceeds • Governed by IRC section 72 • Payments separated into 3 categories • Annuity payments • Payments of interest only • Amounts not received as an annuity

8. Ordinary Level Premium Whole Life Insurance Chapter 13 Tools & Techniques of Life Insurance Planning • Tax Implications (cont'd) • Annuity payments • Periodic payments received in a systematic liquidation of cash value • Each payment is treated partially as recovery of investment and partially as taxable interest • Once entire investment has been recovered, any further payments are treated entirely as taxable income • Payments of interest only • Taxable income whether distributed or credited to account

9. Ordinary Level Premium Whole Life Insurance Chapter 13 Tools & Techniques of Life Insurance Planning • Tax Implications (cont'd) • Amounts not received as an annuity • Taxed under the “cost recovery rule” • Included in gross income only to the extent they exceed the investment in the contract • Exceptions • Modified Endowment Contracts • Cash distributions taxed under the interest first rule • Loan Proceeds • If a loan is outstanding when a policy is surrendered, gains in the contract are immediately recognized

10. Ordinary Level Premium Whole Life Insurance Chapter 13 Tools & Techniques of Life Insurance Planning • Alternatives • Combination of level premium deferred annuity and decreasing term insurance • Distributions from annuity taxed under the interest first rule • Term portion may require increasing premium contributions to cover the increasing mortality risk • Combination of investments in tax free municipal bonds and decreasing term insurance • Interest paid on debt secured by municipal bonds is not tax deductible • A universal life policy configured as a level premium policy • Mortality costs and expenses could be increased

11. Ordinary Level Premium Whole Life Insurance Chapter 13 Tools & Techniques of Life Insurance Planning • Evaluating dividend paid on par policies • Compare current crediting rate and length of guarantees • Compare current mortality and expenses to guarantees levels of mortality and expenses • Look at bailout provisions that reduce or eliminate surrender charges if investment performance does not meet reasonable guidelines • Check policy loan provision for level of interest credited to borrowed versus non-borrowed cash values • Check financial soundness of carrier