The circle of safety: How to protect yourself and your family if you die…what everyone must know about life insurance

By Sheriece Strickland

What you’ll discover in this report:

§  How to make sure your family is really protected!

§  Cut through the confusing “insurance jargon” and know what a life insurance policy really says!

§  The different kinds of life insurance policies…what they’re good for, when to use which one

§  Why smart consumers use life insurance…and the mistakes that other people make too often…and much more!

How to protect your family if you die…

ife insurance is a simple concept — you buy a policy that pays to your beneficiary or beneficiaries when you die — but the decisions of what kind life insurance to purchase, how much of a death benefit and how much you pay are extremely complex.

* Note.  There are more than 2,000 companies selling life insurance in this country. Some are very good, financially solid companies; others are not so sound. A company’s financial strength is vitally important to you because, hopefully, no one is going to collect on your life insurance for a long time.

You want to make sure your life insurer will be around for the long haul. How do you do this? You can consult a seasoned insurance professional, which is probably your best bet, or you can look at how various independent organizations “rate” the life insurers you are considering. Ratings are like school grades, A+, A, A-, B+, etc. In general, it’s wise to stick with companies that are rated A or better by most rating organizations.

Many Purposes for Life Insurance

Life insurance is far more than just a decision of how much to buy. Depending on your financial situation, life insurance can be used for a variety of purposes, such as:

§  estate planning

§  accumulating cash

§  transferring wealth

§  achieving estate tax liquidity.

Life insurance is like auto insurance in that you can buy a lot of it or not very much at all. Life insurance differs from auto insurance in that, depending on the type of policy you buy, you can pay a lot or a little for basically the same death benefit. Keep in mind, though, that the younger and healthier you are, the less you will pay for coverage. Life insurers really, really like to have their policyholders around for a long, long time.

* Tip.  So how much life insurance do you need? It depends. One common benchmark is your death benefit should be about six to eight times your annual earnings, but there are a variety of factors to consider: Other income sources.

• The size of your family.
• Whether your spouse works and his or her earning capacity now and in the future.
• The number of people who are financially dependent on you and for how long.
• The death benefits your family will receive from Social Security and any life insurance plan at your work.
• And any special needs such as mortgages, college education funds and estate planning.

Make Sure Death Benefit Is Adequate

Now, what kind of life insurance should you buy? Guess what? It depends. But keep this very important principle in mind:

* Tip.  Whatever kind of policy you buy, you should make sure it provides enough of a death benefit to meet your family’s needs if you aren’t here. So when you consider buying life insurance, start off with a number in mind of what your family must have in terms of a death benefit. Don’t lose sight of this number.

What kinds of life insurance policies are there? There are several, but keep in mind that the terms and costs of the policies vary widely among insurers.

There are two basic types:

§  term life, which is good for only a certain period of time, and,

§  cash-value, which is “permanent” insurance that also includes a buildup of value in cash in addition to your death benefit. You can borrow against your cash value. You can even take out some of that cash value, but your death benefit will be reduced.

What exactly is “cash value?”  It’s that part of a permanent life insurance policy not needed for so-called “mortality expenses.” The greater your risk of dying, for whatever reason, in the near term, the greater your mortality expense to your insurer.

When young, healthy people buy life insurance, they have a very low mortality cost to their insurer (which is why life insurers are so willing to provide coverage to the young and healthy).

What You Need to Know about Term Life Insurance…

Term life policies provide coverage for specific periods of time, sometimes as little as one year. While you usually can renew term life policies for one or more terms even if your health has changed, there’s potentially a big risk here if you get sick during the term.

* Tip.  If your health does change, you probably won’t be able to buy another term without seeing your premium skyrocket. You should ask your insurer or agent what the premium will be if you continue to renew the policy.

* Note.  You should also ask whether you will lose the right to renew the policy when you reach a certain age. Because this coverage is fairly cheap, it’s often a good option for young people in good health who can’t afford to buy “permanent” coverage.

Here are a couple of term life policy options:

§  Yearly Renewable Term Life — This is coverage for a longer term, five, 10 or 20 years. The longer term also means that the costs to cover you are spread out so that you will avoid the potential for huge annual premium increases.

§  Convertible Term Life — This is yearly renewable with the option to convert to a permanent policy in the future. The coverage, which often has the lowest cost and highest death benefit options of term insurance, can be a good choice for younger people who can’t afford

permanent coverage but who need a large death benefit and the option to convert to a permanent policy down the road.

§  What you need to know about Cash Value Life Insurance…

Cash-value life policies have premiums that are higher at the beginning than they would be for the same amount of term insurance.

The part of the premium not used to cover the yearly cost for mortality and other expenses is invested by the company and builds up a cash value that you may use in a variety of ways. Here are some specific examples of cash-value life insurance:

§  Whole (or Ordinary) Life — Like other cash-value policies, this is permanent coverage, where the cost is literally stretched out over your entire life, or what the insurance company expects your entire life period to be. Life insurers have tables that tell them how long, on average, someone of your age and physical health will live.

Say you want $500,000 in coverage. The insurance company’s rates are based on how much it needs to charge you in order to allow the company to recoup the eventual death benefit while you are alive. The premium and the death benefit don’t change much in whole life policies. You pay so much a month for a given death benefit. However, dividends to policyholders can increase the coverage or decrease the premium.

§  Universal Life — This is the flexible life insurance. You can change your premium and your death benefit at any time, although a substantial increase in the coverage usually requires you to prove you are still in good health.

§  Variable Life — This is a hybrid whole/universal coverage in which the death benefit is dependent on the investment performance of the insurance company’s assets. And you get to choose the investment vehicle — money market fund, bond fund or stock fund — for your premium.

* Note.  If your investments do well, your policy’s cash value and death benefit will increase. If not, they’ll go down, but most variable life policies won’t let your death benefit drop below a certain level. However, it’s possible a company will charge you for a guaranteed death benefit.

So which type of policy is best for you? In general, if you have significant assets, it’s better (and less risky) to have some sort of cash-value policy. But which one? Actually, it’s more important to buy the coverage from an insurer that has the best chance of performing well in the future.

An insurer that has low actual expenses and mortality costs. Such an insurer will be able to offer better terms, including higher death benefits, higher cash value and lower premiums.

* Tip.  But, again, there are more than 2,000 companies selling life insurance in the United States. As a result, you have thousands and thousands of options. This makes it even more imperative that you have a trained insurance professional analyze your financial situation and determine what kind of policy from which insurer is best for you.

Be a smart consumer…but don’t try to be your “own agent.”  Protection for you and your family requires constantly vigilance….and a partnership between you and your  professional agent.  For the latest information on how to save money AND get the best protection for yourself and the people you care most about

call Asset Protection Planners at 505-352-4437.

Summary: Several bills have recently been introduced in Congress with regards to the federal estate tax. Even though there is little chance these bills will pass during this Congressional session, and the exact level of the future estate tax exemption and rate are unknown, this recent legislation, as well as the position of the presidential candidates, give us a good idea of the future of estate tax reform.

Analysis: With 2010, and the one-year repeal of the estate tax fast approaching, it is expected that Congress will act to establish permanent estate tax reform. Two estate tax bills have been introduced in Congress, one each in the House and Senate. 

House Bill: The House bill was introduced by Rep. Jim McDermott (D-WA). It contains the following:

Estate tax exemption of $2 million (indexed for inflation), with reunification of the lifetime exemption and estate tax exemption.
Estate tax rate of 45% for estates between $1.5 and $5 million; 50% for estates between $5 and $10 million; and 55% for estates over $10 million.
Reintroduction of the credit for state death taxes paid and repeal of the deduction for state death taxes paid.
Ability for a surviving spouse to add any unused exemption from deceased spouse (known as spousal exemption portability) to their $2 million exemption.
Senate Bill: The Senate bill was introduced by Sen. Thomas Carper (D-DE) and co-sponsored by Sen. George Voinovich (R-OH) and Sen. Patrick Leahy (D-VT). It contains the following:

Estate tax exemption level of $3.5 million per person, indexed for inflation.
Estate tax rate of 45%.
No reunification of lifetime exemption and estate tax exemption, but with a maximum gift tax rate of 35%.
Change the way credit for gift taxes paid is calculated to gift tax rates in effect at the time of death (as opposed to at the time of the gift).
 Positions of the Republican and Democratic presidential candidates:

Sen. John McCain’s (R-AZ) position:

Estate tax exemption level of $5 million per person, indexed for inflation.
Estate tax rate of 15-20%.
Make permanent the current deduction for estate taxes paid to states (rather than restoring the state death tax credit).
No stated position on reunification of lifetime exemption and estate tax exemption.

Sen. Barack Obama’s (D-IL) position: 

Estate tax exemption level of $3.5 million per person, indexed for inflation.
Estate tax rate of 45%.
No stated position on state death tax deduction or credit.
No stated position on reunification of lifetime exemption and estate tax exemption. 
Reference: For more information, please see H.R. 6499 and S. 3284.

REASONS TO REPLACE AN EXISTING POLICY

There are many reasons to consider replacing an older policy with a new one, including:

 Secondary insurance company guarantees

One of the newer policy design features for universal life policies is the ability to have the carrier fully guarantee the death benefit based on a given premium structure. In recent years, many policies, particularly universal life policies, have seriously underperformed due to declining interest rates. These new carrier guarantees totally remove any fear that policy performance will be adversely affected by future changes in interest rates or mortality experience.

Loan treatment

Large policy loans often make it difficult to maintain policies on an affordable basis. Fortunately, under the Sec. 1035 rules for tax-free policy exchanges, loans can often be transferred on a favorable basis along with the cash value of an existing life insurance policy to a new life insurance policy on the same insured, as long as the owner of the new policy is also the same. More competitive plans
Whether it’s a TV, a computer, or an insurance policy, product improvements are inevitable, and prices tend to decrease with product innovations. With insurers cutting their expenses and distribution costs and making other pricing improvements, more competitive products, with lower costs and/or features and benefits not available on earlier plans, may now be available.

 More underwriting classes

When universal life policies were introduced about 25 years ago, only two classes of standard underwriting were generally available: smoker and non-smoker. Since then, many new classes have been added for both smokers and non-smokers, ranging up to SuperPreferred. This means that healthy insureds can now often acquire much more attractively priced policies.

 Company strength

One of the most important factors to consider is the strength and stability of the issuing life insurance company. This is particularly true with the new policies that have secondary carrier guarantees. The higher the rating of a company, the more likely it is that this company will keep its promises to policy owners. Ratings are reviewed annually by third parties and vary by criteria.

 Special underwriting programs

If you are currently rated, and your current insurance company will not remove the rating, it is possible that you could qualify for a new policy under a special underwriting program under which rated cases up to a certain table rating, often Table 4, will automatically be issued standard. If your health has improved from a previous rating or is currently viewed more favorably, this type of program could be of significant benefit.

Life settlements

A life settlement is an innovative wealth and estate planning tool that involves the sale of an inforce life insurance policy in the secondary market, generally to institutional investors. It is typically used when the coverage is no longer needed or has become too expensive, or when a more attractive new policy is being obtained and the sale price is in excess of the policy’s cash value that could otherwise be rolled over in a Sec. 1035 tax-free exchange. In other words, a life settlement enables policyowners to get cash out of their policies in excess of the policies’ cash value (if any) while they are still alive. Convertible term policies on older insureds that would otherwise lapse are excellent candidates for life settlements.

 Extended maturity

Many existing policies have an age 95 maturity date. When a policy matures, the policy cash values could become payable to the policyowner, and taxes could be due on any gain. If that occurs, the insurance contract will be deemed completed, and the face amount will not be paid. If you live to the maturity of a policy, another issue could arise related to loans. One of the real benefits of universal life policies is the ability to withdraw cash values up to cost basis tax free, then switch to loans, also tax free. However, if a policy lapses or matures with an outstanding loan, any previously untaxed gain that was received will become taxable. Paying income tax at that time could be devastating to a policyowner, as the taxes that are due could significantly exceed the net cash value received from the policy. This problem is avoided with some new policies that have no maturity date. They are designed to continue the death benefit as long as the insured lives. At age 100, most internal policy charges are often discontinued, but cash value (if any) continues to accumulate at the current interest rate. If loans exist, as long as there is a positive cash value, no tax will be due. At death, the net death benefit (face amount minus loans and withdrawals) is paid free of income taxes.

 Legislative changes

We mentioned previously that recent legislative changes have adversely affected how certain policies or policy transactions are treated for income tax purposes. However, if a policy subject to the prior more favorable rules is exchanged to a newer plan pursuant to a Sec. 1035 tax-free exchange, the prior more favorable rules typically carry over into the new policy.

 Underwriting pool

In pricing their policies, insurance companies include provisions in their mortality charges that reflect natural changes over the years in the overall health status of each pool of insureds underwritten at the same time. This leads to higher built-in mortality costs as the pool of insureds ages and becomes “stale”, for two reasons: (1) The insureds in the pool have become older, and (2) Their overall health has declined. Replacing a policy (in the same underwriting class) places you in a new “fresh” pool of healthy insureds, with corresponding lower mortality costs. In addition, improvements in medical science and the way insurance companies structure their policies can have a dramatic positive effect on the cost of insurance. As a result, many new policies have lower mortality charges leading to more favorable policy performance.

REASONS TO REPLACE AN EXISTING POLICY

There are many reasons to consider replacing an older policy with a new one, including:

 Secondary insurance company guarantees

One of the newer policy design features for universal life policies is the ability to have the carrier fully guarantee the death benefit based on a given premium structure. In recent years, many policies, particularly universal life policies, have seriously underperformed due to declining interest rates. These new carrier guarantees totally remove any fear that policy performance will be adversely affected by future changes in interest rates or mortality experience.

Loan treatment

Large policy loans often make it difficult to maintain policies on an affordable basis. Fortunately, under the Sec. 1035 rules for tax-free policy exchanges, loans can often be transferred on a favorable basis along with the cash value of an existing life insurance policy to a new life insurance policy on the same insured, as long as the owner of the new policy is also the same. More competitive plans
Whether it’s a TV, a computer, or an insurance policy, product improvements are inevitable, and prices tend to decrease with product innovations. With insurers cutting their expenses and distribution costs and making other pricing improvements, more competitive products, with lower costs and/or features and benefits not available on earlier plans, may now be available.

 More underwriting classes

When universal life policies were introduced about 25 years ago, only two classes of standard underwriting were generally available: smoker and non-smoker. Since then, many new classes have been added for both smokers and non-smokers, ranging up to SuperPreferred. This means that healthy insureds can now often acquire much more attractively priced policies.

 Company strength

One of the most important factors to consider is the strength and stability of the issuing life insurance company. This is particularly true with the new policies that have secondary carrier guarantees. The higher the rating of a company, the more likely it is that this company will keep its promises to policy owners. Ratings are reviewed annually by third parties and vary by criteria.

 Special underwriting programs

If you are currently rated, and your current insurance company will not remove the rating, it is possible that you could qualify for a new policy under a special underwriting program under which rated cases up to a certain table rating, often Table 4, will automatically be issued standard. If your health has improved from a previous rating or is currently viewed more favorably, this type of program could be of significant benefit.

Life settlements

A life settlement is an innovative wealth and estate planning tool that involves the sale of an inforce life insurance policy in the secondary market, generally to institutional investors. It is typically used when the coverage is no longer needed or has become too expensive, or when a more attractive new policy is being obtained and the sale price is in excess of the policy’s cash value that could otherwise be rolled over in a Sec. 1035 tax-free exchange. In other words, a life settlement enables policyowners to get cash out of their policies in excess of the policies’ cash value (if any) while they are still alive. Convertible term policies on older insureds that would otherwise lapse are excellent candidates for life settlements.

 Extended maturity

Many existing policies have an age 95 maturity date. When a policy matures, the policy cash values could become payable to the policyowner, and taxes could be due on any gain. If that occurs, the insurance contract will be deemed completed, and the face amount will not be paid. If you live to the maturity of a policy, another issue could arise related to loans. One of the real benefits of universal life policies is the ability to withdraw cash values up to cost basis tax free, then switch to loans, also tax free. However, if a policy lapses or matures with an outstanding loan, any previously untaxed gain that was received will become taxable. Paying income tax at that time could be devastating to a policyowner, as the taxes that are due could significantly exceed the net cash value received from the policy. This problem is avoided with some new policies that have no maturity date. They are designed to continue the death benefit as long as the insured lives. At age 100, most internal policy charges are often discontinued, but cash value (if any) continues to accumulate at the current interest rate. If loans exist, as long as there is a positive cash value, no tax will be due. At death, the net death benefit (face amount minus loans and withdrawals) is paid free of income taxes.

 Legislative changes

We mentioned previously that recent legislative changes have adversely affected how certain policies or policy transactions are treated for income tax purposes. However, if a policy subject to the prior more favorable rules is exchanged to a newer plan pursuant to a Sec. 1035 tax-free exchange, the prior more favorable rules typically carry over into the new policy.

 Underwriting pool

In pricing their policies, insurance companies include provisions in their mortality charges that reflect natural changes over the years in the overall health status of each pool of insureds underwritten at the same time. This leads to higher built-in mortality costs as the pool of insureds ages and becomes “stale”, for two reasons: (1) The insureds in the pool have become older, and (2) Their overall health has declined. Replacing a policy (in the same underwriting class) places you in a new “fresh” pool of healthy insureds, with corresponding lower mortality costs. In addition, improvements in medical science and the way insurance companies structure their policies can have a dramatic positive effect on the cost of insurance. As a result, many new policies have lower mortality charges leading to more favorable policy performance.

Reasons to Conduct a Personal Policy Review

 There are many reasons to conduct an in-depth review of your life insurance. Some of these reasons are as follows:

•  Your need for life insurance may have increased or decreased.
• Extended periods of low interest rates may have adversely affected policy performance, and more premium dollars may now be needed to meet policy charges.
•  Your health might have improved, qualifying you for a better rating.
•  Your family or business situation may have changed.
• Loans, withdrawals, or other policy activity may have affected policy performance.
•  Premiums may not have been paid as planned.

 More favorable medical underwriting classes are now being offered compared to years ago.
A thorough, detailed, and unbiased analysis will demonstrate whether, and to what extent, your current life insurance policies can be improved upon. If you are considering making changes to your existing life insurance program, it is important to weigh the implications of your choices. There is no “right” answer, only the need to determine what is most important to you.

This Personal Policy Review will provide you and your professional advisory team with the tools necessary to determine if there are any new opportunities to be pursued and to analyze your policies’ performance against original projections.

 In addition: This in-depth analysis will disclose options for you to consider if modifications or alternatives to your current program need further discussion. The analysis may result in helping to maximize the value of your current policies and help keep your estate plan in line with your original goals. Possible improvements to your underwriting class can be considered. Valuable new riders might be available.

Why is a gift of a remainder interest attractive?

This gift is attractive because it allows individuals and couples to make substantial gifts and generate meaningful income tax deductions without having to change their lifestyles.

Let’s assume Mary Ross, age 72, is a widow with six children who live in other areas of the country and are doing quite well financially. Mary plans to leave the majority of her estate to her children, but would also like to make a charitable gift as part of her estate plan. Because none of Mary’s children live in the area and are not interested in the home, Mary decides to make a gift of her home now to her favorite charity. In doing so, she will retain the right to live in it for the rest of her life and will also retain the responsibility for maintaining it.

Because Mary has made a qualifying gift to a recognized charity, she is entitled to a charitable income tax deduction for the present value of the future (remainder) interest going to the charity. If the home were worth $2 million, Mary would receive an income tax deduction of approximately $1,140,000, assuming that the federal interest rate was 5%.

Are there limitations on the amount of charitable deductions that can be taken against income?

Charitable deductions can only be taken against adjusted gross income (AGI). Generally, AGI is all of your income, but there are some minor exceptions. For a gift of a remainder interest, you can deduct up to 30% of your AGI in any one year if you make the gift to a public charity. This percentage limitation decreases to 20% of AGI for gifts to charities other than public charities. Since charitable gifts are itemized deductions, those families with higher incomes may lose some benefit of the deduction because of the phase out of the itemized deduction. It is extremely important that you consult with your tax advisor prior to making a gift of a remainder interest in a residence to determine if you can fully benefit from the income tax deduction.

Gift of a Remainder Interest in a Residence Outline

If you are considering a Remainder Interest, this report will give you important information that you must have.

Get your Free Report “Disadvantages of a Remainder Interest in a Residence”

1. Are you concerned about preserving the assets that you spent years accumulating?
2. Have you recently had a life changing event?
3. Are you adequately protecting the economic value of your life?
4. Have you properly planned for the unexpected?

A yearly review of your life insurance policy(ies) will alleviate the stress of not knowing the answers to these questions. Make sure
your policy(ies) are keeping pace with your life; Call your
financial professional today and ask for a Personal Policy Review
Analysis.

When your life insurance policies were purchased, certain
assumptions were made about policy charges, interest rates,
planned premiums, etc. Perhaps the original reason for your
purchase still exists, or your needs might have changed, requiring
more or less coverage. It is important to periodically review the
status of your policies so that the life insurance you need will be
there when you need it. This Personal Policy Review will help
determine your current needs.

The benefits of keeping your life insurance up to date:

• Provides the appropriate amount of survivor income
• Insures that the debt you have accumulated is paid
• Supplements your retirement income
• Insures your spouse’s retirement
• Protects your estate
• The ability to leave the legacy that you always imagined
• Protects your business
• Attracts or retains key employees

THE PERSONAL POLICY REVIEW
This program is designed to give you a better understanding of your life insurance policy performance with an aim towards reviewing actual policy performance against the original projections of policy performance.

WHY CONDUCT A PERSONAL POLICY REVIEW?

Life insurance is one of the largest most valuable assets within an estate – whether it is owned by an individual, a business, or a trust – as part of an overall estate plan. When your life insurance policy(ies) were purchased, certain assumptions were made, such as policy charges, interest rates, planned premiums, etc. Perhaps
the original reason for your purchase still exists, or your needs might have changed, requiring more or less coverage. That being said, this valuable asset should be evaluated, reviewed, and analyzed on a periodic, comprehensive basis. The life insurance industry has undergone many transformations in the past
decade, making it more important then ever to re-evaluate your policy(ies) so that your life insurance will be there when you need it.

REASONS YOU SHOULD CONSIDER A LIFE INSURANCE REVIEW

• Your need for life insurance may have increased or decreased.
• Extended periods of low interest rates may have affected policy    performance, and more premium dollars may now be needed to meet policy charges.
• Your health might have improved, qualifying you for a better rating.
• Your family or business situation may have changed.
• Loans, withdrawals, or other policy activity may have affected the policy performance.
• Premiums may not have been paid as planned.
• More favorable medical underwriting classes are now being offered compared to years ago.

Your life insurance policy(ies) may be greatly improved upon once a thorough, detailed, and unbiased analysis has taken place. If you are considering making changes to your existing life insurance plan, it is important to weigh the implications of your choices. There is no “right” answer, only the need to determine what is most important to you.

BENEFITS TO YOU

The Personal Review Program allows you and your financial professional to review your current policy(ies) to determine if there are any new opportunities and to analyze the policies’ performance against original projections.

• An in-depth analysis will offer options for you to consider if modifications or alternatives need further discussion
• The program may result in helping to maximize the value of your policy(ies) and help keep your estate plan in line with your original goals.
• Possible improvements to your underwriting class can be considered
• Valuable new riders that might be available

FREQUENTLY ASKED QUESTIONS

• What does Section 1035 mean?
A Section 1035 exchange is the process of directly transferring accumulated funds in a life insurance policy to another life insurance policy or to an annuity policy, or from one annuity to another, without creating a taxable event. A Section 1035 exchange
allows you to exchange outdated contracts for more current and efficient contracts, while preserving the original policy’s tax basis and deferring recognition of gain for federal income tax purposes.

• What is an “inforce” ledger?
Your present life insurance company will enter current cash values of your contract and “re-project” those values into the future based on premium levels and other variables such as current interest rates. This will enable you to compare this “future projection” to the original projection when the policy was issued. Of course, this is based on non-guaranteed assumptions (so actual results may vary).

• What can affect the performance of your life insurance contract?
1. Interest rate return – the interest rate on the underlying investments that is currently being credited to the policy.
2. Expenses – Including acquisition costs (commissions, administrative fees, etc.)
3. Mortality Charges – The current, non-guaranteed charge for mortality within the policy.
Interest rate return is the factor that will most affect the policy performance. In illustrations, there is an “assumed”, non-guaranteed or current interest rate projection and a “guaranteed” projection. The “guaranteed” projection uses factors that are guaranteed by policy contracts. The “assumed or current”, non-guaranteed
projection is a “guesstimate” of how the policy will perform in the future based on current non-guaranteed interest rates, mortality, and expense projections. Any future changes would again affect policy performance. This is another reason why periodic reviews are strongly recommended.

• Have there been changes in the current expense and mortality
charges in new life insurance contracts?
Generally speaking, the expense and mortality costs for life insurance policies have declined in the last 10-15 years. The expenses have been lower due, in part, to the mergers and acquisitions within the insurance industry. This has resulted in a more efficient marketplace and lower associated expenses with a policy. Also, mortality charges have been reduced as medical and health improvements have helped contribute to people living longer.

REASONS TO KEEP AN EXISTING POLICY

• New contestable Period
Any time a new policy is purchased, a new contestable period begins.
Policies can be contested within the first two years after issue to
discover if any material information was not revealed on the application that would have affected the insurer’s decision to issue the policy. For replacements with the same insurer, some companies
apply a new contestable period only for an increase in the face amount of insurance.

• New suicide Period
A new 2-year suicide period also generally begins with a new policy.
It is important to be fully aware of this provision. For replacements with the same insurer, some companies apply a new suicide period only for an increase in the face amount of insurance.

• Existing loans
Some policies offer favorable loan interest rates or wash loans after a policy has been in force for a period of time, often 10 years. In some situations, loans are not transferable from one policy to another. Additionally, some insurers do not recognize the
transfer of a loan as a tax-free exchange, even if the receiving
company can accept a loan.

• New acquisition costs
New life insurance contracts contain sales charges and acquisition costs that must be recouped via the payment stream. Older policies
may already have accounted for these charges.
• Guaranteed crediting rates There may be a higher guaranteed
minimum interest crediting rate on an older policy.

• Surrender period is less Beginning a new life insurance policy also means a new period for surrender charges. It could be that
the existing policy is almost out of, or completely out of, the surrender period.
• Special internal exchange rules Some insurers have special internal exchange rules that may apply in the event the policy needs to be changed. This might include favorable underwriting, or waiving
surrender charges on the transfer.
• Change in underwriting status – for the worse If you have  experienced an adverse change in health, a new policy might have a higher rating. It may be best to consider paying additional premiums into the existing policy to keep it in force.

• Legislative benefits – pre-TAMRA, cash rich testing Tax laws can change the definition of a life insurance policy and how it is taxed. If a contract was issued before June 21, 1988, it may have
some tax benefits that are not available with a new policy. Older
policies are not governed by the rules for Modified Endowment
Contracts (MECs). This rule severely reduces the amount of money that can be deposited in a life insurance policy in the early
years without losing the “first in, first out” (FIFO) provision for life insurance. If a policy is a MEC, any money withdrawn is considered interest first and subject to a 10% penalty if withdrawn before age 59½. In addition, the life insurance “corridor” amounts were much higher on policies issued before June 21, 1988, so that there were much higher funding limits than for policies issued after that date.

Another date to remember is December 31, 1984, which relates to cash-rich testing, also known as the Recapture Ceiling Test. This
usually occurs when there is a reduction in benefits under the
contract (face reduction, PUA surrender, etc.). Policies issued
before December 31, 1984, are not subject to this test.

REASONS TO EXCHANGE A POLICY

• Secondary Guarantees
One of the newer policy design features for universal life policies includes the ability to have the carrier guarantee the death benefit based on a fixed premium structure. This guarantee applies even if there is a sustained drop in interest rates or if the current cash
value declines or disappears. The real benefit of this type of policy is that you can be assured that the death benefit will be guaranteed by the carrier, as long as the premium is paid according to schedule.

• Loan Treatment
Having a significant loan on a policy may seem insurmountable, but this does not have to be the case. Under the Sec. 1035 exchange rules, the IRS allows for the transfer of a loan along with the cash value from an existing life insurance policy to another life
insurance policy, as long as the owner of the new policy is the same. Some new insurance policies offer attractive loan interest rates that might not be available on the existing policy. There may even be an option of a “wash loan”, meaning that the interest
that is credited on the loan amount is the same as is charged for the loan. This could be important if it is not planned to pay back the loan. Another potential benefit is the ability to use a cash withdrawal to completely or partially pay back the loan. However, there may not be favorable tax treatment on the transfer if the purpose is to pay back the loan. If the loan is to be paid back via a cash withdrawal, it may be desirable to consider paying back the policy loan in a different policy year. Remember, loans and withdrawals will reduce cash values and death benefits, and surrender charges and taxes may also apply.

• More Competitive Plans
Whether it’s a TV, a computer, or an insurance policy, product improvements are inevitable, and prices tend to decrease because of new innovations. In relation to life insurance products, insurers are cutting expense and distribution costs. This combined
with other pricing improvements can lead to a much more competitive product, with lower costs and/or features and benefits not available on earlier plans.

• Preferred and plus underwriting
When universal life was introduced 25 years ago, only two classes of standard underwriting were available, smoker and non-smoker. Since that time, these classes have been subdivided into Preferred, Preferred Plus, and in some instances Preferred Select Plus (the actual names of underwriting classes may vary from carrier to carrier). This occurred fist for the non-smoker class and later for the smoker class. If you fall into one of the preferred classes, there could be benefits from the lower mortality charges
resulting from the exchange. If you fall into the standard class, however, it is possible that the mortality charges on the current policy could be lower than for the same underwriting class on a new policy.

• Company strength
One of the most important factors you should consider is the strength and stability of the issuing life insurance company. This is particularly true with policies that have secondary carrier guarantees. The higher the rating of a company, the more likely it is that this company will keep its promises to policy owners. Ratings are reviewed annually by third parties and vary by criteria.

• Special Underwriting Programs
If you are currently rated, and the existing company will not remove the rating, it is possible that you could qualify under a special underwriting program. This is a program where rated cases up to a certain table rating, often Table 4, will automatically be issued
a standard rating. If your health has improved from a previous rating, or your health is currently viewed more favorably, a program like this could be of significant benefit.

• Life Settlements
A life settlement is an innovative wealth and estate planning tool that involves the sale of an inforce life insurance policy in the secondary market, generally to institutional investors. It is typically used when the coverage is no longer needed or has become too expensive, or when a more attractive new policy is being obtained and the sale price is in excess of the policy’s cash value that would otherwise be rolled over in a Sec. 1035 taxfree exchange. Put another way, it enables policyowners to get cash out of their policies in excess of the policies’ cash value (if any) while they are still alive. Convertible term policies on older insureds that would otherwise lapse are excellent candidates for life
settlements.

• Extended Maturity
Many existing policies have an age 85, 90, or 95 maturity date. When a policy matures, the policy cash values could become payable to the owner of the policy and taxes could be due on any gain. If that occurs, the insurance contract will be deemed completed, so that
the face amount will not be paid. If you live to the maturity of a policy, another issue could arise related to loans. One of
the real benefits of universal life policies is the ability to withdraw cash value up to cost basis tax free, then switch to loans, also tax free. However, if a policy matures with an outstanding loan or lapses, any previously untaxed gain that was received will become
taxable. Paying income tax at that time could be devastating to a policyowner, as the taxes that are due could significantly exceed the net cash value received from the policy. This problem is avoided with some new policies that have no maturity date. They are designed to continue the death benefit as long as the insured lives. At age 100, most charges are discontinued, and any cash value continues to accumulate at the current interest rate. If loans exist, as long as there is a positive cash value, no tax will be due. At death, the net death benefit is paid (i.e., the face amount minus loans and
withdrawals).

• Legislative benefits – pre TAMRA
Previously we mentioned that if a contract was issued before June 21, 1988, it might have some tax benefits that are not available with a new policy. If one of these plans is exchanged to a newer plan via a Sec. 1035 exchange, it is quite likely that the new plan
will not be a MEC despite the large initial cash dump-in. When cash is transferred from one policy to another and the transaction qualifies under Sec. 1035, the transferred cash value does not generally cause the new policy to be a MEC.

• Better Mortality
Along with dramatic improvements in medical science comes a corresponding increase in life expectancies. Because of this, many new policies have lower mortality expenses than existing policies, sometimes significantly lower.

A Wealth Replacement Trust (WRT) is often used to replace the value of assets given to
charity. To replace the assets given to charity, the donor creates a WRT, also called an
irrevocable life insurance trust, which purchases, often with part of the tax savings from
the charitable gift income tax deduction, a life insurance policy on the life of the
donor(s). The death proceeds escape estate taxation because the policy is owned by the
WRT. At the death of the donor(s), the proceeds of the WRT are distributed to the
beneficiaries to replace the value of the assets that have gone to the charity.

What are the advantages of a WRT?

A WRT have the following advantages:

• The assets in the trust are exempt from estate tax.

• It can provide asset protection against creditor and liability issues of beneficiaries.

• The trust assets can be distributed to the beneficiaries the way the trustmaker
wants.

• Trust assets can be used for beneficiaries’ maintenance, support, health, and
education.

• Assets of the trust can be transferred to future generations.

• The trust can hold assets in addition to life insurance.

• Cash in the wealth replacement trust can be used to purchase assets from an
estate, providing liquidity to pay estate taxes.

• The trust can be created by just one trustmaker, making it        
possible for the other spouse to be a beneficiary.

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 “The Crucial Questions to Ask Before Entering a Wealth Replacement Trust”