Life Insurance Review Issues

1. Life InsuranceReview Issues

2. Factors That Cause Life Insurance Policies to Be Reviewed • A decline in ratings of the in-force insurance carrier. • A Comdex review of the in-force carrier. • Keep in mind that where a promise of future performance is sold for present dollars, the buyer is at the seller’s mercy. • A review of the impact of declining interest rates or dividend scales on the non-guaranteed assumptions of the in-force policy. • A review of policy risk. • A change in company structure

3. Factors That Cause Life InsurancePolicies to Be Reviewed(continued) • A proper review will assist your insured to get the most insurance for their money and make certain that the insurance product is high quality and reliable. • Regulation require that the relationship between insurer and policy holder remain reasonable and every effort has been made to maintain policy holder expectations. A review of policy provisions confirms that this relationship is clear and fair. • Guarantees are only as good as the guarantor. A thorough evaluation of the carrier should be paramount to selection of contracts promising long term guarantees. • Review the laws of your state on the fiduciary responsibilities of trustee owned policies.

4. General Rules OfA Trustee’s Duty

5. General Rules Of A Trustee’s Duty - To Review Insurance That IsNo Longer Prudent • General rule: A trustee must review investments on a regular basis and dispose of investments that are no longer prudent within a reasonable time- this applies to life insurance policies. • A trustee who violates their fiduciary responsibility can be held personally liable for any loss to the investment. • This rule applies to investment management both inter vivos and testamentary (during and after lifetime). • Every state has different statutes and/or case law interpretation of a trustee’s duties under specific fact situations.

6. General Rules Of A Trustee’s Duty - To Review Insurance That IsNo Longer Prudent (continued) • In most states, the trust document trumps state law unless trust provisions are clearly illegal or against public policy. • The majority of states have statues that read “It is the duty of the trustee to exercise prudence in determining whether to retain investments made by the settler” (prudent man rule). • Professional responsibility is to review the investment to determine if the fiduciary responsibility has been compromised. The courts have ruled a trustee is not justified in retaining investments that are no longer appropriate.

7. Selected Issues In1035 Exchanges

8. Selected Issues In 1035 Exchanges • The ability to defer gain in a life insurance, annuity, or endowment contract through a section 1035 exchange can be of significant benefit to a policyholder. As the above discussion indicates, however, it is important that the exchange be effected correctly, and that all potential tax implications are fully considered. Failure to do so may not only result in a loss of the deferral, but the loss of a client as well. • Section 1035 exchanges are an integral part of the life insurance business. Unfortunately, these exchanges can have unexpected results and their income and estate tax implications are not always fully understood. • This information will review a variety of exchange transactions. It will explain the known tax ramifications of these transactions, and point out those instances in which the results are not entirely clear. As most of you are aware, the law is often uncertain, making the business of exchanging life insurance policies difficult at times. • Nevertheless, the attempt here is to provide you with guidance to help you avoid some of the pitfalls posed by section 1035 exchanges.

9. Exchanges in LifeInsurance Contracts • Section 1035(a) of the Internal Revenue Code provides that no gain or loss will be recognized on the exchange of a life insurance contract for another life insurance contract, for an annuity contract or for an endowment contract. As the following will indicate, certain conditions will apply; and the transaction may have other implications that should be understood: • Contract with an Outstanding Premium Loan • Exchange of the policy following a partial surrender • Exchange of a Modified Endowment Contract • Exchange of a pre-June 21, 1988 single premium life insurance contract • Policy loan limits- Exchange of a pre-June 21, 1986 Business-owned contact • Grandfathered loan limits • Business Exchange rider • Change of ownership in a policy exchange • Exchange for a Life-Two policy • Exchange into an existing contract

10. A Life Insurance Analysis Prepared For:Sample Client

11. What do I Have? XYZ. Co. Universal Life Policy Issue Age 47, Current Age 65 Non Guaranteed Results Based on a Hypothetical Annual Gross Return of 6.00% and current charges

12. What Can I Do? 1035 The Net Cash Surrender Valuefrom the current XYZ Company to aFully Guaranteed Universal Life Policyand never worry about your policy lapsing again.

13. Exchange to aNo Lapse Guarantee

14. What is a No Lapse Guarantee? • The No Lapse Guarantee provides an extended death benefit guarantee period up to age 100 or for any period of time specified by the policyholder up to age 100 provided sufficient premiums are paid • As long as … • Planned premium is paid on or before the first day of each policy year that it is due. • There are no policy loans, withdrawals, increases in face amount ortermination of the No-Lapse Guarantee. • The Net Policy Protection value is greater than zero, the No LapseGuarantee will be in effect. • The coverage cannot terminate even if the net cash surrender value falls to zero or below.

15. What happens to the guarantee provided if premiums are different than illustrated? • The guarantee period depends on the NLG value, which is highly dependent upon the amount of premiums that are paid earlier than illustrated, or if higher premiums are paid, the guarantee period will be longer than illustrated. Conversely, if premiums are paid later or at lower levels, the guarantee period will be shortened. • Each annual report you receive for your policy will provide a projection of how long the policy will remain in-force, based on premiums paid and guaranteed assumptions. If the projection is not what you expected you as the agent will need to have run an in-force illustration to solve for the premium required to restore the guarantee. Each company handles their catch-up provision differently so make sure you are aware of this so you do not lose the chance to get back the No Lapse Guarantee.

16. Gary M. Baker: gbaker@bakco.comSteve Gallo: steve@bakco.comLiz Turpin, CLU, ChFC: liz@bakco.comwww.bakco.com1-888-899-6599 Baker Associates’ Sales Team is available to help you with your next 1035 exchange case.