The Risks Associated with “Universal Life” And……How to avoid them!!!! James Britton CFP

1. The Risks Associated with “Universal Life” And……How to avoid them!!!! James Britton CFP

2. Consider the way they sell cars

3. Or this….

4. Marketing Universal Life

5. Marketing Universal Life CCRA

6. Marketing Universal Life • Risks!!! • Compliance!!! • Lawsuits!!!

7. Risks: • How was it Sold? • Why Was It Sold Improperly? • What’s the Solution?

8. Risk #1 - MTAR • In its simplest form MTAR is the maximum amount of money an insurance policy can hold on a tax sheltered basis. • Values in excess of the MTAR are transferred to a side account which is taxed annually. • Regulation 306 (1),(2),(3) and (4)

9. How was it Sold? • Illustration “War” sells an exciting story • Tax Free Cash Accumulation • Tax Free Income • Attracted Financial Planners to Life Insurance

10. MTAR

11. The Illustration At 8% Linear Growth the Account Value is always less than the MTAR….

12. MTAR Risk • Why was it Sold Improperly?

13. Why was it sold Improperly? • Competing for market share • Did not understand the • Investment Risk • Did not understand the Tax Risk

14. MTAR Risk

15. The Illustration $1,250,000 in taxes in 30 years 1 15 30 $630,000 Original Estate Value

16. The Illustration 1 15 30 $630,000 Original Estate Value

17. The Illustration 1 15 30 $1,750,000 Original Estate Value

18. The Illustration $65,000 in taxes in year 30 1 15 30 $1,750,000 Original Estate Value

19. Why is this education important? • Lawsuits!! • E & O Claims • Class Action Suits • Public Image & Reputation

20. The Solution • KYC • Investment Objectives • Risk Tolerance

21. MTAR Smoothing Features • AIG • Maritime Life/ Manu • National

22. Risk #2 – Increase and Reversals?? • Minimized • Fund Builder • Optimized • Calibrator • Wealth Enhanced • Accumulator

23. So Why is it Sold This Way? • To accommodate the • “Illustration War” • Lack of knowledge of the Risk

24. So Why is it Sold This Way? Account Value MTAR of “Minimized Policy” Regulation 306 Prohibits more than an 8% Increase.

26. Risk #3 - The 250% Rule This rule is to discourage the use of an insurance policy from sheltering large sums of money from Inheritances, windfalls, etc. The Anti Dump In Rule……….

27. The 250% Rule Policies can not shelter any more than 250% of the cash surrender value 3 years prior. It starts in the 10th year and continues every year thereafter…… …….and I mean every year thereafter

28. The 250% Rule Year 10 $25,000 CSV Year 7 $10,000 CSV

29. Year 10 $45,000 = 20,000 in CSV and 25,000 inheritance The 250% Rule Year 7 $10,000 CSV

30. Year 11 $25,000 The 250% Rule Year 8 $14,000 CSV Year 7 $10,000 CSV Year 10 $8,000

31. Year 11 $25,000 The 250% Rule Year 10$20,000 Year 7 $14,000 CSV Year 8 $10,000 CSV

32. Risk #4 – MER’s • Are they guaranteed • Do they include IIT

33. Risk #4 – 90%/110% TSE 300

34. S&P 500 Results

35. Risk #5 – Net Returns • Index or Managed Funds???? • Value or Growth????

36. Do Investment Styles Truly Perform Differently? Last four years: S&P/Barra Value - S&P/Barra Growth Deviation from the S&P 500 S&P500

37. Risk #5 – Net Returns • Look at the period 1960 to 1982 • Dow Jones 550 grew to 1050 • Templeton • 1960 $9.10 • 1982 $9.28 • 1971 5/1 Stock Split • 1979 3/1 Stock Split

38. The Risks Associated with “Universal Life” And……How to avoid them!!!! jbritton@pipfs.com James Britton CFP

39. Thank You