FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC

Understanding IUL

Presented by…Levi Robinson, CLU, ChFC, FLMIDirector Product & Market Training

American General Life

FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC

Agenda

• Life Insurance Uses

• IUL Value Proposition

• IUL How Does It Work

• Interest Crediting Options

• Cap/Participation Setting Process

• Policy Loans

• Questions?

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Source: LIMRA

The Case For IUL 2012 Stats

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Life Insurance Uses…

• Replacing income lost due to the premature death of a family wage

earner.

• Providing liquidity at the appropriate time to pay estate settlement

costs.

• Transferring wealth free of income taxes to heirs in succeeding

generations.

• Funding non-qualified executive benefits.

• Funding buy-sell arrangements to maintain business continuity.

• Supplementing retirement income.

FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC

Benefits of Life Insurance

Premium Benefits

Duration

$10

$500

$1000

$2000

$3000

$4000

$5000

20 40 60 80

Minimum Premium = the lowest amount the insurance company will

accept for life insurance death benefit based on your age and

underwriting decision.

The Highest Amount of Premium the government will allow to be paid into a life

insurance contract without triggering a Modified Endowment Contract (MEC)

MEC Limits

Minimum Premium = the lowest amount the insurance company will accept for the life insurance death benefit based on your age and underwriting decision, aka, Term Premium

Minimum Premium = the lowest amount the insurance company will accept for the life insurance death benefit based on your age and underwriting decision, aka, Term Premium

The Highest Amount of Premium the government will allow to be paid into a life insurance contract without triggering a Modified Endowment Contract (MEC)

The Highest Amount of Premium the government will allow to be paid into a life insurance contract without triggering a Modified Endowment Contract (MEC)

Term Premium

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Benefits of Life Insurance

Premium Benefits

Duration

$100

$500

$1000

$2000

$3000

$4000

$5000

20 40 60 80

Term Premium = Tax Free Death Benefit

Tax Free Death BenefitTax Deferred Accumulation

High Contribution LimitsAccess to Capital

Competitive IRRCollateral

Liquidity, Control UseDisability Protection

Estate Tax Free

Guaranteed Interest

The Highest Amount of Premium allowed without triggering MEC.

MEC Limits

Bottom line, the more premium paid into a life insurance policy, the greater

the benefits!

Bottom line, the more premium paid into a life insurance policy, the greater

the benefits!

FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC

IUL Value Proposition

Upside Potential

No Downside Risk

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Value Proposition

Market Upside

Downside Protection

Long-Term Yield

Advantage Over CAUL

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What is IUL?

• A life insurance policy that combines the features & benefits of a traditional UL but uses a different crediting method for determining interest

• Indexed interest is based, in part, on the movement of a stock market index over a specific time period

• Potential to earn indexed interest is based on increases in an index, while offering a minimum interest rate guarantee (normally 0% - 2%)

• Potential for higher than average crediting rates compared to traditional UL

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IUL vs Traditional UL

Indexed UL

Traditional UL

Flexible Premium YES YES

Permanent Insurance YES YES

Designed to cover Insured’s lifetime YES YES

Pays interest rate as determined by the company YES YES

Net premiums are invested in and backed by the company’s general account YES YES

Use “month-iversary” concept for COIs and other charges YES YES

Include a flexible death benefit and a choice for the death benefit option YES YES

Can include Rolling Target Premiums YES YES

Provide for tax-deferred cash value accumulation YES YES

Include the potential for significant cash value growth YES YES

Incorporate guarantee features YES YES

Include a guaranteed interest rate YES YES

Allow for withdrawals and loans YES YES

The major difference between traditional universal life and indexed universal life is the way interest is credited

Upside earnings potential with index-linked interest crediting YES NO

FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC

FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC

IUL Overview

Different method for determining and crediting

Non-guaranteed interest

• Fixed UL: declared interest - by carrier

• Index UL: indexed interest - reference stock market index

General account product

• No policy owner investments in separate accounts (unlike VUL)

• Policy owner only chooses allocation to index crediting account

• No securities license required

• Improper product design/marketing can have securities implications

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Interest Crediting

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Crediting Options

With index universal life insurance, you acquire the death benefit protection you need plus the opportunity to build cash value that you can access in the future for a variety of needs.

Index universal life insurance offers you the flexibility to choose among various interest-crediting accounts that can fit your needs.

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Crediting Options

1)Declared Interest Account

2)Index Interest Account with Annual Cap

3)Index Interest Account with Participation Rate

Index universal life insurance gives you the ability to adjust to life’s changes.

FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC

Crediting Options

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What Determines The Possible Interest

Credits?

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FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC

Index Strategies

An indexed strategy uses a formula that calculates interest

based in part on the movement of a stock market index,

such as the S&P 500 Index.

Index UL has different index strategies where your clients can

direct their money in an effort to take advantage of positive

movements in a stock market index.

FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC

What Are The Moving Parts?

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Participation Rate

• The Participation Rate is the percentage of index

interest growth (if any) the policy owner receives as

actual index interest credited to the policy in the

year in which crediting occurs.

FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC

Understanding Participation Rates

Example: Assuming no cap, a participation rate of 60% and a guarantee of 2%:

If the index increases 10% policy credited 6% (60% x 10%)

If the index increases 50%, policy credited 30% (60% x 50%)

If the index increases 0%, policy credited 2% (guarantee rate)

If the index decreases 10%, policy credited 2% (guarantee rate)

Participation: the percentage of positive index movement which will be used in the crediting calculation

• Acts as one factor in determining a ceiling on crediting rate of the policy

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Cap Rate

• The Cap Rate is the maximum point-to-point index

interest growth (if any) the policy owner can receive

as actual index interest credited to the policy.

FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC

Understanding Cap Rates

Example: Assume a cap of 10% (participation rate of 100%) and a guarantee of 1%:

If the index increases 8%, policy credited 8% (100% x 8%)

If the index increases 20%, policy credited 10% (100% x 10%)

If the index increases 0%, policy credited 1% (guarantee rate)

If the index decreases 10%, policy credited 1% (guarantee rate)

Point to Point: the period of time over which the index is being measured.

• Each index term has a beginning date and an ending date.

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Determining Cap & Participation Rates

• Step 1 - Premium invested in fixed income investments

• Step 2 - Net investment earnings provide guaranteed interest rate

• Step 3 - Remaining earnings purchase one-year or longer call options on the specific index or indices.

• Price of call options relative to investment earnings is primary factor in determining participation rate

• This is commonly referred to as a carrier’s “option budget”

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What Happens Next?

• Market rises, call options are exercised

• Policy credited with indexed interest

• Market decreases, options expire (worthless)

• Policy credited with guarantee, or

• Other selected policy options

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IUL Cap Setting Process

Policy OwnerPolicy Owner

Company/Policy Value

$100,000

Company/Policy Value

$100,000

Corporate Bond

5%=$5,000

Corporate Bond

5%=$5,000

Investment Bank 12.00 cap=$4,000Investment Bank 12.00 cap=$4,000

Policy Cash Value

Corporate Bond Rate of Return

Cost of Index Option

Cap Rate

$100,000 5% $4,000 12%

Guarantee/Spread

Deducted$1,000

Guarantee/Spread

Deducted$1,000

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Earned Rates Impact on IUL

Source: US Treasury – treasury.gov and St. Louis Federal Reserve Bank – stlouisfed.org

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Earned Rates Impact on IUL

6.0% Company’s Earned Rate on Assets

- 0.5% Interest Spread/Guaranteed Interest

5.5% Option Budget (amount co. has available to purchase options)

5.5% Company’s Earned Rate on Assets

- 0.5% Interest Spread/Guaranteed Interest

5.0% Option Budget (amount co. has available to purchase options)

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Policy Loans

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Policy Loan Types

• Fixed Loan – both the loan rate and the borrowed funds are fixed

• Variable Loan – Two types where both the loan rate and the borrowed funds participate in an index –

• True Variable loan - loan charge rate set by the Moody’s Corporate Bond Average while the funds continue to participate in the index account

• Fixed Loan with Participating Funds - Participating variable loan has a fixed loan rate while the funds continue to participate in the index account (less aggressive type of loan structure)

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Variable Loans Pros & Cons

Pros•Allows indexed values to remain & participate in the performance of the index/indices account

• Allows the opportunity for the index to outperform the loan rate being charged.

•Heavily marketed by some carriers• Variable loans illustrate higher

disbursements compared to standard loans

• Becomes an illustration game - easy to out-illustrate other competitors, especially with a true variable loan structure

Cons•Possibility the amount credited from index interest or fixed interest accounts is less than the interest charged

•Risk if index performs at less than the interest charged, the policy could lapse or income reduced

•Illustrations almost always show a “positive” spread.

• Allows the opportunity for the index to outperform the loan rate being charged.

•Loan charge could change on previous loans

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Illustration Comparisons

• Use several different illustrated rates

• Be sure your carrier illustrates index interest lower than the

interest rate on a variable loan

• The greater the difference in outcomes

• – The greater the risk in the product

• It is impossible to know how often a policy will credit interest up

to a caps

• Do a thorough review of all the other features and benefits of

the policy

FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC

Why Index UL?

• Upside accumulation potential from index interest• Interest based on a diversified equity position

• Downside cash value protection

• Guaranteed interest rates• Eliminate losses

• Lock in gains

• Guaranteed death benefits thru secondary guarantees (Depending on product)

• Declared Interest Account

• Tax efficient distribution methods

• Overloan protection

FOR PRODUCER USE ONLY – NOT FOR DISSEMINATION TO THE PUBLIC

Questions

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Policies issued by:American General Life Insurance Company (AGL)2727-A Allen Parkway, Houston, TX 77019

The United States Life Insurance Company in the City of New York (US Life)One World Financial Center, 200 Liberty Street, New York, NY 10281

The underwriting risks, financial and contractual obligations and support functions associated with the products issued by AGL or US Life are the issuing insurer’s responsibility. Guarantees are subject to the claims-paying ability of the issuing insurance company. US Life is authorized to conduct insurance business in New York. Policies and riders not available in all states. American General Life Companies, www.americangeneral.com, is the marketing name for a group of affiliated domestic life insurers, including AGL and US Life.

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AGLC106658