The Risks Associated with “Universal Life” And……How to avoid them!!!! James Britton CFP
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The Risks Associated with “Universal Life” And……How to avoid them!!!! James Britton
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The Risks Associated with “Universal Life” And……How to avoid them!!!! James Britton CFP. Consider the way they sell cars. Or this…. Marketing Universal Life. Marketing Universal Life. CCRA. Marketing Universal Life. Risks!!!. Compliance!!!. Lawsuits!!!. Risks:. How was it Sold?. - PowerPoint PPT Presentation
Transcript of The Risks Associated with “Universal Life” And……How to avoid them!!!! James Britton CFP
The Risks Associated with
“Universal Life”
And……How to avoid them!!!!
James Britton CFP
The Risks Associated with
“Universal Life”
And……How to avoid them!!!!
James Britton CFP
Consider the way they sell carsConsider the way they sell carsConsider the way they sell carsConsider the way they sell cars
Or this….Or this….Or this….Or this….
Marketing Universal LifeMarketing Universal LifeMarketing Universal LifeMarketing Universal Life
Marketing Universal LifeMarketing Universal LifeMarketing Universal LifeMarketing Universal Life
CCRA
• Risks!!!• Risks!!!
Marketing Universal LifeMarketing Universal LifeMarketing Universal LifeMarketing Universal Life
• Compliance!!!• Compliance!!!
• Lawsuits!!!• Lawsuits!!!
• How was it Sold?• How was it Sold?
• Why Was It Sold Improperly?• Why Was It Sold Improperly?
• What’s the Solution?• What’s the Solution?
Risks:Risks:Risks:Risks:
Risk #1 - MTARRisk #1 - MTARRisk #1 - MTARRisk #1 - MTAR
• In its simplest form MTAR is the In its simplest form MTAR is the maximum amount of money an maximum amount of money an insurance policy can hold on a tax insurance policy can hold on a tax sheltered basis.sheltered basis.
• Values in excess of the MTAR are Values in excess of the MTAR are transferred to a side account which is transferred to a side account which is taxed annually.taxed annually.
• Regulation 306 (1),(2),(3) and (4)Regulation 306 (1),(2),(3) and (4)
• In its simplest form MTAR is the In its simplest form MTAR is the maximum amount of money an maximum amount of money an insurance policy can hold on a tax insurance policy can hold on a tax sheltered basis.sheltered basis.
• Values in excess of the MTAR are Values in excess of the MTAR are transferred to a side account which is transferred to a side account which is taxed annually.taxed annually.
• Regulation 306 (1),(2),(3) and (4)Regulation 306 (1),(2),(3) and (4)
How was it Sold?How was it Sold?How was it Sold?How was it Sold?
• Illustration “War” sells an exciting story• Illustration “War” sells an exciting story
• Attracted Financial Planners to Life Insurance
• Attracted Financial Planners to Life Insurance
• Tax Free Cash Accumulation• Tax Free Cash Accumulation
• Tax Free Income• Tax Free Income
MTARMTARMTARMTARMax Funded Contract
0.00
500,000.00
1,000,000.00
1,500,000.00
2,000,000.00
2,500,000.00
3,000,000.00
3,500,000.00
1 5 9 13 17 21 25 29
MTAR
Account Value
Max Funded Contract
0.00
500,000.00
1,000,000.00
1,500,000.00
2,000,000.00
2,500,000.00
3,000,000.00
3,500,000.00
1 5 9 13 17 21 25 29
MTAR
Account Value
Max Funded Contract
0.00
500,000.00
1,000,000.00
1,500,000.00
2,000,000.00
2,500,000.00
3,000,000.00
3,500,000.00
1 5 9 13 17 21 25 29
MTAR
Account Value
The IllustrationThe IllustrationThe IllustrationThe Illustration
At 8% Linear Growth the Account Value is always less than the MTAR….
At 8% Linear Growth the Account Value is always less than the MTAR….
MTAR RiskMTAR RiskMTAR RiskMTAR Risk
• Why was it Sold Improperly?• Why was it Sold Improperly?
Why was it sold Improperly?Why was it sold Improperly?Why was it sold Improperly?Why was it sold Improperly?
• Competing for market share• Competing for market share
• Did not understand the Tax Risk• Did not understand the Tax Risk
• Did not understand the Investment Risk
• Did not understand the Investment Risk
MTAR RiskMTAR RiskMTAR RiskMTAR Risk Max Funded Contract
0.00
500,000.00
1,000,000.00
1,500,000.00
2,000,000.00
2,500,000.00
3,000,000.00
3,500,000.00
4,000,000.00
1 5 9 13 17 21 25 29
MTAR
Account Value
Equities
Max Funded Contract
0.00
500,000.00
1,000,000.00
1,500,000.00
2,000,000.00
2,500,000.00
3,000,000.00
3,500,000.00
4,000,000.00
1 5 9 13 17 21 25 29
MTAR
Account Value
Equities
Max Funded Contract - Simulated Rates
0.00
1,000,000.00
2,000,000.00
3,000,000.00
4,000,000.00
5,000,000.00
6,000,000.00
7,000,000.00
8,000,000.00
MTAR
Account Value
Max Funded Contract - Simulated Rates
0.00
1,000,000.00
2,000,000.00
3,000,000.00
4,000,000.00
5,000,000.00
6,000,000.00
7,000,000.00
8,000,000.00
MTAR
Account Value
$1,250,000 in taxes in 30 years$1,250,000 in taxes in 30 years
$630,000 Original Estate Value$630,000 Original Estate Value
1 15 301 15 30
The IllustrationThe IllustrationThe IllustrationThe Illustration
Max Funded Contract - Simulated Rates
0.00
1,000,000.00
2,000,000.00
3,000,000.00
4,000,000.00
5,000,000.00
6,000,000.00
7,000,000.00
8,000,000.00
MTAR
Account Value
Max Funded Contract - Simulated Rates
0.00
1,000,000.00
2,000,000.00
3,000,000.00
4,000,000.00
5,000,000.00
6,000,000.00
7,000,000.00
8,000,000.00
MTAR
Account Value
1 15 301 15 30
$630,000 Original Estate Value$630,000 Original Estate Value
The IllustrationThe IllustrationThe IllustrationThe Illustration
Max Funded Contract Increased Face -Simulated Rates
0.00
1,000,000.00
2,000,000.00
3,000,000.00
4,000,000.00
5,000,000.00
6,000,000.00
7,000,000.00
MTAR
Account Value
Max Funded Contract Increased Face -Simulated Rates
0.00
1,000,000.00
2,000,000.00
3,000,000.00
4,000,000.00
5,000,000.00
6,000,000.00
7,000,000.00
MTAR
Account Value
1 15 301 15 30
$1,750,000 Original Estate Value$1,750,000 Original Estate Value
The IllustrationThe IllustrationThe IllustrationThe Illustration
Max Funded Contract Increased Face -Simulated Rates
0.00
1,000,000.00
2,000,000.00
3,000,000.00
4,000,000.00
5,000,000.00
6,000,000.00
7,000,000.00
MTAR
Account Value
Max Funded Contract Increased Face -Simulated Rates
0.00
1,000,000.00
2,000,000.00
3,000,000.00
4,000,000.00
5,000,000.00
6,000,000.00
7,000,000.00
MTAR
Account Value
$65,000 in taxes in year 30$65,000 in taxes in year 30
1 15 301 15 30
$1,750,000 Original Estate Value$1,750,000 Original Estate Value
The IllustrationThe IllustrationThe IllustrationThe Illustration
Why is this education important?Why is this education important?Why is this education important?Why is this education important?
• Lawsuits!!• Lawsuits!!
• E & O Claims• E & O Claims
• Class Action Suits• Class Action Suits
• Public Image & Reputation• Public Image & Reputation
The SolutionThe SolutionThe SolutionThe Solution• KYC• KYC
• Investment Objectives• Investment Objectives
• Risk Tolerance• Risk Tolerance
MTAR Smoothing FeaturesMTAR Smoothing FeaturesMTAR Smoothing FeaturesMTAR Smoothing Features• AIG• AIG
• Maritime Life/ Manu• Maritime Life/ Manu
• National• National
Risk #2 – Increase and Risk #2 – Increase and Reversals??Reversals??Risk #2 – Increase and Risk #2 – Increase and Reversals??Reversals??
• Minimized• Minimized
• Optimized• Optimized
• Wealth Enhanced• Wealth Enhanced
• Fund Builder• Fund Builder
• Calibrator• Calibrator
• Accumulator• Accumulator
So Why is it Sold This Way?So Why is it Sold This Way?So Why is it Sold This Way?So Why is it Sold This Way?
• Lack of knowledge of the Risk• Lack of knowledge of the Risk
• To accommodate the “Illustration War”• To accommodate the “Illustration War”
So Why is it Sold This Way?So Why is it Sold This Way?So Why is it Sold This Way?So Why is it Sold This Way?
Account ValueAccount ValueMTAR of “Minimized Policy”MTAR of “Minimized Policy”
Regulation 306 Prohibits more than an 8% Increase.
Regulation 306 Prohibits more than an 8% Increase.
Risk #3 - The 250% RuleRisk #3 - The 250% RuleRisk #3 - The 250% RuleRisk #3 - The 250% Rule
This rule is to discourage the use of an This rule is to discourage the use of an insurance policy from sheltering large sums insurance policy from sheltering large sums of money from Inheritances, windfalls, etc. of money from Inheritances, windfalls, etc.
This rule is to discourage the use of an This rule is to discourage the use of an insurance policy from sheltering large sums insurance policy from sheltering large sums of money from Inheritances, windfalls, etc. of money from Inheritances, windfalls, etc.
The Anti Dump In Rule……….The Anti Dump In Rule……….
The 250% RuleThe 250% RuleThe 250% RuleThe 250% Rule
Policies can not shelter any more than 250% Policies can not shelter any more than 250% of the cash surrender value 3 years prior. of the cash surrender value 3 years prior.
It starts in the 10It starts in the 10thth year and continues every year and continues every year thereafter……year thereafter……
…… …….and I mean every year .and I mean every year thereafterthereafter
Policies can not shelter any more than 250% Policies can not shelter any more than 250% of the cash surrender value 3 years prior. of the cash surrender value 3 years prior.
It starts in the 10It starts in the 10thth year and continues every year and continues every year thereafter……year thereafter……
…… …….and I mean every year .and I mean every year thereafterthereafter
The 250% RuleThe 250% RuleThe 250% RuleThe 250% Rule
Year 7 $10,000
CSV
Year 7 $10,000
CSV
Year 10 $25,000
CSV
Year 10 $25,000
CSV
The 250% RuleThe 250% RuleThe 250% RuleThe 250% Rule
Year 7 $10,000
CSV
Year 7 $10,000
CSV
Year 10 $45,000 =
20,000 in CSV and 25,000 inheritance
Year 10 $45,000 =
20,000 in CSV and 25,000 inheritance
The 250% RuleThe 250% RuleThe 250% RuleThe 250% Rule
Year 10
$8,000
Year 10
$8,000
Year 8 $14,000
CSV
Year 8 $14,000
CSV
Year 11
$25,000
Year 11
$25,000
Year 7 $10,000
CSV
Year 7 $10,000
CSV
The 250% RuleThe 250% RuleThe 250% RuleThe 250% RuleYear 10$20,000Year 10$20,000Year 7
$14,000 CSV
Year 7 $14,000
CSV
Year 11
$25,000
Year 11
$25,000
Year 8 $10,000
CSV
Year 8 $10,000
CSV
Risk #4 – MER’sRisk #4 – MER’sRisk #4 – MER’sRisk #4 – MER’s
• Are they guaranteed
• Do they include IIT
• Are they guaranteed
• Do they include IIT
$950
$1,000
$1,050
$1,100
$1,150
$1,200
$1,250
$1,300
$1,350
Crediting Full Index & Dividends
Crediting Full Index No Dividends
Crediting Index With Div. - 90% up / 110% down weekly
Crediting Index With Div. - 90% up / 110% down daily
$950
$1,000
$1,050
$1,100
$1,150
$1,200
$1,250
$1,300
$1,350
Crediting Full Index & Dividends
Crediting Full Index No Dividends
Crediting Index With Div. - 90% up / 110% down weekly
Crediting Index With Div. - 90% up / 110% down daily
Risk #4 – 90%/110% TSE 300Risk #4 – 90%/110% TSE 300Risk #4 – 90%/110% TSE 300Risk #4 – 90%/110% TSE 300
S&P 500 ResultsS&P 500 ResultsS&P 500 ResultsS&P 500 Results
$925
$975
$1,025
$1,075
$1,125
$1,175
$1,225
$1,275Crediting Full Index & Dividends
Crediting Full Index No Dividends
Crediting Index With Div. - 90% up / 110% down weekly
Crediting Index With Div. - 90% up / 110% down daily
$925
$975
$1,025
$1,075
$1,125
$1,175
$1,225
$1,275Crediting Full Index & Dividends
Crediting Full Index No Dividends
Crediting Index With Div. - 90% up / 110% down weekly
Crediting Index With Div. - 90% up / 110% down daily
Risk #5 – Net ReturnsRisk #5 – Net ReturnsRisk #5 – Net ReturnsRisk #5 – Net Returns
•Index or Managed Funds????
•Value or Growth????
•Index or Managed Funds????
•Value or Growth????
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
Dec-97 Dec-98 Dec-99 Dec-00 Dec-01
S&P/Barra Growth
S&P/Barra Value
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
Dec-97 Dec-98 Dec-99 Dec-00 Dec-01
S&P/Barra Growth
S&P/Barra Value
S&P500S&P500
Do Investment Styles Truly Do Investment Styles Truly Perform Differently?Perform Differently?
Do Investment Styles Truly Do Investment Styles Truly Perform Differently?Perform Differently?
Last four years: S&P/Barra Value - S&P/Barra GrowthDeviation from the S&P 500Last four years: S&P/Barra Value - S&P/Barra GrowthDeviation from the S&P 500
Risk #5 – Net ReturnsRisk #5 – Net ReturnsRisk #5 – Net ReturnsRisk #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
•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
The Risks Associated with
“Universal Life”
And……How to avoid them!!!!
James Britton CFP
The Risks Associated with
“Universal Life”
And……How to avoid them!!!!
James Britton CFP
Thank YouThank You
