For Agent Use Only / Not for Public Distribution cn57038122010 Solutions That Leave an Impression In the Wholesale Brokerage World

Indexed Universal Life Insurance – A broad discussion of how companies generally Design Indexed Universal Life Insurance policies

Michael Pinkans, CFA

Senior Vice President – Zenith Marketing Group, Inc.

For Agent Use Only / Not for Public Distribution cn57038122010

What We’ll Cover

History of Indexed Universal Life (IUL) What is Indexed Life?

Regulatory environment Indexed Life mechanics Company Positioning/ Gotcha’s Q&A For Agent Use Only / Not for Public Distribution cn57038122010

History of IUL

Developed in mid 90’s as EIUL Sales slow until 2002

–

Accelerated since ‘04

–

Over 30 companies

–

About $500 million sales (IA’s about $25B) Why?

–

VUL below 0% returns?

–

No variable licensing

–

Design features – variable loans

– –

Declining WL dividend scales and UL crediting rates Companies with IA’s – easier transition For Agent Use Only / Not for Public Distribution cn57038122010

Cautions

Producers may have migrated to IUL to avoid securities licenses – “next best thing”

–

But, IUL is closer to fixed UL, not VUL Goal of IUL is to “beat” current assumption UL rates by 150-200 bps long term For Agent Use Only / Not for Public Distribution cn57038122010

Sales Applications

Anytime CASH ACCUMULATION/DISTRIBUTION is important

–

Pension Max, College Funding, Personal Retirement, ROTH Alternative Not as a term alternative – that’s the UL NLG marketplace Not useful in an ILIT For Agent Use Only / Not for Public Distribution cn57038122010

What is Indexed Life?

Combines features & benefits of traditional UL but uses a different crediting method for determining interest Interest credited is linked (in part) to movement of a stock market index over a period of time Potential to earn interest based on increases, if any, in an equity index, while offering minimum interest rate guarantees (may be 0%, 1%, 2% or slightly higher) Potential for higher average crediting rates than more traditional UL For Agent Use Only / Not for Public Distribution cn57038122010

What is Indexed Life?

So:

Potential for greater cash value & death benefit than more traditional UL More cash value protection against market declines than VUL For Agent Use Only / Not for Public Distribution cn57038122010

What is Indexed Life?

IT IS NOT…

IT IS NOT an investment in the stock market and does not directly participate in any stock, equity or bond investments IT IS NOT the client buying or participating directly in the index IT IS NOT a policy where cash value is based upon performance of client selected sub-accounts (variable life) Does NOT offer FULL Upside Potential For Agent Use Only / Not for Public Distribution cn57038122010

What is Indexed Life?

A Middle Ground…

Traditional UL Indexed Life Not better… different VUL For Agent Use Only / Not for Public Distribution cn57038122010

Why The Time May Be Right For IUL

Current focus on accumulation and distribution Pricing changes to no lapse guarantee UL and term rates Customers more comfortable with an index Unattractive rates on current assumption UL and WL For Agent Use Only / Not for Public Distribution cn57038122010

Indexed UL Versus Indexed Annuities

Will be differences in how contract works Customers must understand the guarantees in each contract

–

Must stronger in annuities

•

Lower caps and participation rates For Agent Use Only / Not for Public Distribution cn57038122010

Regulatory Environment

NASD 05-50

Is an Equity Indexed Annuity a Security?

Is an Indexed Life?

–

Depends in part on how the product is positioned, presented and sold Some B/D’s don’t allow the sale; others have approved lists For Agent Use Only / Not for Public Distribution cn57038122010

Regulatory Environment

Inappropriate Sales Language

Actual claims mentioned in NASD 05-50

–

“What if the market goes down and you would lose nothing? The market goes up you gain?”

–

“A WIN/WIN Investment vehicle!”

–

“Growth Potential without Market Risk.” For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics Interest Crediting

Potential to earn interest based in part on the movements of an index such as:

Standard & Poor's 500 ® Composite Stock Price Index Dow Jones Industrial Average Index NASDAQ-100 Lehman US Aggregate US Treasury Indexes Hang Seng Index Standard & Poor’s ® ,” " S&P ® ," “S&P 500 advisability of purchasing any product.

® ,” “Standard & Poor’s 500,” and “500” are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by Security Life of Denver Insurance Company. No product is sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding the Hang Seng Index – An index of the largest and most liquid stocks listed on the Stock Exchange of Hong Kong. It does not reflect dividends payable on the underlying stocks. For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics Interest Crediting

The index is looked at on a certain date; that is the beginning of that particular index segment period At end of index segment period:

–

if index is higher, the policy owner can earn additional interest paid by the insurance company

–

if the index stays flat or declines, cash value is still credited with a minimum guaranteed interest rate Index Segment Period Jan 1 Dec 31 For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics Policy Blocks

Traditional UL premiums can occur at any time

–

What if indexed universal life premiums come in the middle of the index period?

Premium blocks

–

Portion of account value applied to a particular crediting period For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics Interest Crediting

The values of an index vary daily & are not predictable Cash value growth does not reflect dividends on the index Cash value will likely not reflect entire increase of index For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics

Indexing Methods

Point to Point (Annual Reset Crediting)

–

Most common Index Credit May use one or a combination of the following crediting methods to determine amounts credited to the cash value:

–

Participation rate

–

Rate Spreads or Asset Fees

–

Caps For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics Point to Point Participation

Point to Point:

time period over which index is being measured.

Participation:

–

percentage that determines how much of the index’s increase is reflected in the indexed interest Acts as one factor in determining a ceiling on crediting rate of the policy For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics Point to Point Participation

100% Participation Index increases 12% Client gets 12% index interest

–

Subject to any other limits 100% Participation The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.

For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics Point to Point Participation

100% Participation Index decreases 1.5% Client gets minimum guarantee Minimum Guarantee The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.

For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics Point to Point Participation

50% Participation Index increases 12% Client gets 6% index interest

–

Subject to any other limits 100% Participation 50% Participation The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.

For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics Point to Point Participation with Cap

Cap:

upper limit of index increase that can be applied to the policy Often used in conjunction with a participation rate Establishes maximum amount of increase in the index that can be factored into index interest For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics Point to Point Participation with Cap

50% Participation Index increases 30% 30% increase with 50% participation is 15% 10% Cap applied to 15% Client gets 10% index interest

–

Subject to any other limits 50% Participation 10% Cap The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.

For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics Monthly Average Index

Average of index from point "A" through point "B“ Often monthly, but can be annual over multiple years Average Rate The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.

For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics Which is better?

Question: With 12% increase in an index, is client better off with:

A lower 50% participation rate and high 15% cap?

–

50% of 12% = 6% 15% Cap 50% Participation A high 100% participation rate and a lower 10% cap?

–

100% of 12% = 12% capped @ 10% 10% Cap 100% Participation The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.

For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics Bringing it all together

Year 1 – Index increases

Hypothetical example

–

50% Participation rate

– –

12% cap 1% minimum guarantee

– – – –

Cash Value = $1,000 Index increases 20% 20% increase x 50% Part. Rate = 10% End of year 1 Cash Value = $1,100

•

Less any fees and charges For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics Bringing it all together

Year 2 – Index Decreases

Hypothetical example continued

–

50% Participation rate

– –

12% cap 1% minimum guarantee

– – – –

Cash Value = $1,100

•

Ignoring any fees and charges Index drops 10% 1% minimum guarantee credited to policy End of year 2 Cash Value = $1,111

•

Again, less any fees and charges For Agent Use Only / Not for Public Distribution cn57038122010

Other Crediting Strategies

If not point-to-point then some form of averaging

Can be daily, monthly, or annual basis (multiyear) Each day, or month, or year is a factor in the index creating value Averaging more useful in a volatile environment

–

Overall point-to-point outperforms For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Life Mechanics Illustrated Rate

Can be a set rate however it’s usually determined by looking back at past history of Index over a certain period.

–

Can be confusing

•

Does 8% always beat 7% illustrated rate?

For Agent Use Only / Not for Public Distribution cn57038122010

Company AIG American General Life AIG American General Life AIG American General Life Allianz Life Aviva Life and Annuity Co.

Aviva Life and Annuity Co.

Aviva-Indianapolis Life Aviva-Indianapolis Life Aviva Life and Annuity Co. of NY Aviva Life and Annuity Co. of NY Policy Platinum Provider Ultra 500 Elite Index UL 2004 AIG Elite Global IUL GenDex II Lifetime Builder Advantage Builder Vista Advantage Vista Lifetime Lifetime Builder Empire Solution UL Bankers Life Conseco Life ING "Security Life of Denver" Life Insurance Company of the SW Innovative Life EIUL Asset Builder Plus 100% EIAV Indexed Strategic Accumulator UL SecurePlus Paragon Lincoln Benefit Life Ultra Index Lincoln National Life Midland National Life Midland National Life Midland National Life Lincoln LifeElements(sm) IUL XL-DB XL-CV XL-EC Indexed Crediting Rate Utilized 6.58% 7.16% 10.20% 9.29%* 7.95% 7.55% 7.55% 7.95% 7.95% 7.55% 3.12% 4.80% 7.36% 9.70% 8.40% 8.40% 8.4

Guaranteed Crediting Rate 2.00% 1.00% 2.50% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 3.00% 2.00% 3.00% 2.50% 8.00% 8.00% 2.00% 1.00% up to attained age 100; 3.00% thereafter.

3.00% 3.00% Level DB Current Accum Value Year 5 29,615 Level DB Current CV (net) Year 5 21,365 Level DB Current Accum Value Year 30 532,336 29,692 N/R 28,842 29,890 37,271 37,271 29,890 29,890 37,271 31,706 31,500 30,175 29,143 36,721 30,249 35,092 30,712 21,442 N/R 16,942 21,424 28,334 28,334 21,424 21,527 28,334 22,926 21,249 30,175 22,786 27,726 23,976 27,782 21,179 585,902 N/R 905,789 663,387 695,181 695,181 663,387 663,387 695,181 262,058 406,988 528,351 777,193 717,528 613,732 758,182 712,541 Level DB Current Accum Value Year 40 1,080,831 Level DB IRR Current Accum Year 40 5.50% 1,242,034 N/R 2,355,893 1,568,884 1,565,613 1,565,613 1,568,884 1,568,884 1,565,613 430,105 777,014 1,143,688 1,992,938 1,603,322 1,353,431 1,858,951 1,748,393 6.04% N/R 8.42% 6.92% 6.91% 6.91% 6.92% 6.92% 6.91% 1.68% 4.19% 5.72% 7.81% 7.00% 6.36% 7.55% 7.33% Current Level Death Benefit Year 40 1,091,640 Current Increasing DB Year 40 808,510 IRR Current Increasin g DB Year 40 4.35% 1,254,454 931,768 4.92% N/R 2,379,452 1,600,261 1,596,925 1,596,925 1,600,261 1,600,261 1,596,925 421,732 784,785 1,155,125 2,012,867 1,619,356 1,366,966 1,877,541 1,765,876 N/R 1,615,965 1,023,348 1,209,242 1,209,242 1,023,348 0 1,209,242 0 320,693 653,464 819,313 1,038,777 966,408 1,091,632 875,934 N/R 7.03% 5.29% 5.93% 5.93% 5.29% N/A 5.93% N/A 0.32% 3.48% 4.41% 5.35% 5.06% 5.54% 4.67% For Agent Use Only / Not for Public Distribution cn57038122010

12/31 Published Date S&P 500



Historical Performance

Date 12/31/84 12/31/85 12/31/86 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 S&P 500 Value Change 167.25

211.25

242.17

247.08

277.72

353.40

330.22

417.09

435.71

466.45

459.27

615.93

740.74

Value % Change +26.3% +14.6% +2.0% +12.4% +27.3% -6.6% +26.3% +4.5% +7.1% +1.5% +34.1% +20.3% Past performance is not indicative of future performance.

Date 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 S&P 500 Value Change 970.43

1229.23

1469.25

1320.28

1144.89

879.82

1111.92

1211.92

1248 1408 1485 903 1115 For Agent Use Only / Not for Public Distribution cn57038122010 Value % Change +31.0% +26.7% +19.5% -10.1% -13.0% -23.4% +26.4% +9.0% +3.0% +12.8% +5.5% -33.8% +23.5%

Special Features - IUL Variable or Synthetic Loan

Loan amount does not reduce the Indexed Account values

Allows all indexed dollars to Participate in Performance of S&P 500

 –

Allows the opportunity for the S&P 500 to outperform the VLR being charged. (Loan interest is charged annually.) Heavily marketed by some carriers

–

More loans = more cash value accumulation

–

Easy to out-illustrate the competition For Agent Use Only / Not for Public Distribution cn57038122010

Sales Applications

Anytime cash accumulation and/or distribution is important Premium financing Minimum premium to solve for 0 cash – risky

–

Should really overfund contract

– –

Have a longer time horizon Be willing to give up some guarantees for upside potential

–

Absolutely want some guarantees though For Agent Use Only / Not for Public Distribution cn57038122010

Target Customers

Generally under age 65 Longer term time horizon Moderate risk tolerance

–

Willing to assume more than UL risk but less than VUL risk Moderate to heavy funding capability For Agent Use Only / Not for Public Distribution cn57038122010

Competitive Landscape

Performance Drivers

Illustrated/Indexed Rate

–

Over 9% currently Loan structure Crediting strategies

–

Caps

–

Participation Rates

–

Multiple Indices Guaranteed Rates Unique Features/Benefits/Riders For Agent Use Only / Not for Public Distribution cn57038122010

Common Questions

If the participation rate is 100% and the cap is 12% and the index returns 25% didn’t the insurance company make a lot more money?

–

No, the insurance company matches assets & liabilities and buys options on the index (buying an option providing for a possible 12% payout). The seller of the option made the excess return. The insurance company made its expected return on investment – nothing more.

For Agent Use Only / Not for Public Distribution cn57038122010

Common Questions

Is a variable/synthetic loan bad?

–

No, but it must be disclosed to the customer with the pros/cons.

• •

Pros – customer bought into the indexing strategy when buying policy. Strategy may still make sense. Monies stay in indexed account. Will out illustrate any other option and probably even variable life.

Cons – Illustration always shows a “positive” spread. Actual cost of loan could be illustrated rate minus guaranteed credited rate in any given year. 8%?

For Agent Use Only / Not for Public Distribution cn57038122010

Common Questions

There’s too many moving parts to IUL. It seems like the issuing company always has an “out” by changing caps, participation rates, etc. Isn’t it too confusing?

–

Since IUL is a universal life contract, there is disclosure on minimums, guarantees, etc. on the illustration. In fact there is more disclosure than a contract like whole life. In every product line (except perhaps for no lapse guarantee UL and no dividend WL), the insurance company has levers to change based on experience.

For Agent Use Only / Not for Public Distribution cn57038122010

Common Questions

Which index is best to use?

–

It really depends on how the customer will think the market will act…

• •

Linear-up point-to-point better Volatile market averaging better

– –

Averaging will generally credit something Point-to-Point strategies generally better 2/3rds of the time For Agent Use Only / Not for Public Distribution cn57038122010

Common Questions

Why aren’t the caps and participation rates the same for a company’s IA’s and IUL contract?

–

Generally, caps and participation rates will be higher for IUL than for IAs because:

–

The guarantees are stronger on IAs (i.e. 3% on 90%) – less money to buy options

–

The investment horizon for IULs is longer allowing lower cost option buying

•

A few more percent of premium available to buy options with IUL contracts

Common Questions

Isn’t IUL the perfect product – no downside risk but upside market participation?

–

No, IUL is an additive product but doesn’t replace UL or VUL. It’s in between. Base guarantees lower than UL and less upside potential than VUL. This contract should never be compared to VUL – really only fixed UL as the performance will never match the unlimited upside potential of VUL.

For Agent Use Only / Not for Public Distribution cn57038122010

Common Questions

Does the producer/customer really understand all the moving parts of IUL and the positioning of the contract?

–

Probably not. That’s why there’s such an opportunity for our firms – provide the unbiased advice and sell the best contract.

For Agent Use Only / Not for Public Distribution cn57038122010

Male, 45, Pref. NS $1,000,000 Premium Solve to Endow; Pay All Years 7 8 9 Rank 1 2 3 4 5 Company Lincoln Benefit Life North American North American Aviva Life & Annuity American General 6 North American 10 North American Aviva Life & Annuity of NY ING Security Life of Denver American National 11 Lincoln Financial Product Ultra Index Builder IUL *** Builder IUL **** Advantage Builder II Elite Index UL Guarantee Builder IUL *** Guarantee Builder IUL **** Empire Solution II * ING IUL-CV ** ^ Annual Premium $5,964 $6,075 $6,126 $6,137 $6,402 $6,609 $6,660 $6,993 $8,787 Indexed Universal Life $9,010 for 4 years; $7,238 thereafter LifeReserve Indexed UL $9,876 Assumed Rate 8.00% 8.61% 8.61% 9.00% 6.93% 8.61% 8.61% 7.95% 7.94% 8.25% 8.00% Cash Value Year 10 $53,701 $15,195 $15,983 $41,131 $28,194 $17,910 $18,695 $52,272 $42,435 $35,208 $77,702 Notes: 1 - endow at age 120 2 - endow at age 100 3 - endow at age 121 Cash Value Year 20 $153,357 $105,079 $107,812 $132,924 $135,203 Cash Value Year 30 $317,976 $242,243 $249,838 $270,966 $269,827 Target Premium Notes $9,170 $15,770 $15,770 $7,850 1 2 $9,720 $107,576 $244,341 $8,410 1 $110,302 $156,955 $144,307 $147,902 $202,028 $251,917 $304,792 $303,679 $307,831 $368,910 $8,410 $7,850 $18,000 $11,100 2 3 2 2 For Agent Use Only / Not for Public Distribution cn57038122010

Sample Carriers

AIG Elite Global Plus IUL

Accounts

–

– Interest based on the best-performing two out of three international indices based on a 5-year, or 1-year point-to-point term (75%/25%).

S&P 500

– –

Dow Jones EURO STOXX 50 Hang Seng Fixed loans available Illustrates 20 year look back, 55% participation, no cap Sweeps annually 3% annual guarantee Marketing – Foreign participation Customer doesn’t know performance until after the 5th year if 5-year selected For Agent Use Only / Not for Public Distribution cn57038122010

Sample Carriers

ANICO

Accounts

–

S&P 500 Fixed & variable loans available Illustrates at 8.25% Sweeps 1st of every month 2.5% annual guarantee Marketing – CI rider; competes against “sizzle” contracts For Agent Use Only / Not for Public Distribution cn57038122010

Sample Carriers

Lincoln Benefit Life – Ultra Index

Account

–

One year point-to-point based on S&P 500

–

Swept 15th every month

–

100% participation rate guaranteed Fixed loans only 0% annual guarantee but 2% guarantee on surrender or death Illustrates at 8% (also provides avg of S&P 500 over 30 years, 15 years, plus highest and lowest one year change Overloan protection Marketing – strong fixed account (close to current assumption UL); full surrender charge adjustment rider For Agent Use Only / Not for Public Distribution cn57038122010

Sample Carriers

Lincoln LifeReserve Indexed UL

Part of Mass Affluent Product Line

–

Disability Rider

–

ABR for terminal and chronic illness Accounts

–

One year point-to-point

–

One year monthly cap

–

One year monthly average Fixed and Variable loans available Illustrates at 8% Overloan protection Sweeps quarterly 1% annual guarantee 9 year surrender Marketing – a package sale for mass affluent For Agent Use Only / Not for Public Distribution cn57038122010

Sample Carriers

ING – Indexed Universal Life

S&P 500 - annual point-to-point Swept monthly on 28th Illustrated rate 7.83% (20 year look back; 10% cap) 3% annual guarantee Fixed loans Adjustable Term Rider (ATR) Marketing – can build higher early cash value – no surrender charges in any year; refund of sales charges in the first 3 years (current basis); hypo projections – 15 high and 15 low years, premium financing.

For Agent Use Only / Not for Public Distribution cn57038122010

Summary

Remember

This is not a variable product Your client is not invested in the market or the index The index is merely a tool used as a component in the calculation of the interest rate credited to the policy

Educate

your clients about Indexed Life products For Agent Use Only / Not for Public Distribution cn57038122010

Indexed Universal Life Insurance

Questions & Answers

For Agent Use Only / Not for Public Distribution cn57038122010