Transcript Document

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?
• Why Was It Sold Improperly?
• What’s the Solution?
Risk #1 - MTAR
• In its simplest form MTAR is the
maximum amount of money an
insurance policy can hold on a tax
sheltered basis.
• Values in excess of the MTAR are
transferred to a side account which is
taxed annually.
• Regulation 306 (1),(2),(3) and (4)
How was it Sold?
• Illustration “War” sells an
exciting story
• Tax Free Cash Accumulation
• Tax Free Income
• Attracted Financial Planners
to Life Insurance
MTAR
Max Funded Contract
3,500,000.00
MTAR
3,000,000.00
Account Value
2,500,000.00
2,000,000.00
1,500,000.00
1,000,000.00
500,000.00
0.00
1
5
9
13
17
21
25
29
The Illustration
Max Funded Contract
3,500,000.00
MTAR
3,000,000.00
Account Value
2,500,000.00
At 8% Linear Growth the
Account Value is always less
than the MTAR….
2,000,000.00
1,500,000.00
1,000,000.00
500,000.00
0.00
1
5
9
13
17
21
25
29
MTAR Risk
• Why was it Sold Improperly?
Why was it sold Improperly?
• Competing for market share
• Did not understand the
Investment Risk
• Did not understand the Tax Risk
MTAR Risk
Max Funded Contract
4,000,000.00
MTAR
Account Value
Equities
3,500,000.00
3,000,000.00
2,500,000.00
2,000,000.00
1,500,000.00
1,000,000.00
500,000.00
0.00
1
5
9
13
17
21
25
29
The Illustration
Max Funded Contract - Simulated Rates
8,000,000.00
MTAR
7,000,000.00
Account Value
6,000,000.00
5,000,000.00
$1,250,000 in taxes in 30 years
4,000,000.00
3,000,000.00
2,000,000.00
1,000,000.00
0.00
1
15
$630,000 Original Estate Value
30
The Illustration
Max Funded Contract - Simulated Rates
8,000,000.00
MTAR
7,000,000.00
Account Value
6,000,000.00
5,000,000.00
4,000,000.00
3,000,000.00
2,000,000.00
1,000,000.00
0.00
1
15
$630,000 Original Estate Value
30
The Illustration
Max Funded Contract
Increased Face -Simulated Rates
7,000,000.00
MTAR
6,000,000.00
Account Value
5,000,000.00
4,000,000.00
3,000,000.00
2,000,000.00
1,000,000.00
0.00 1
15
$1,750,000 Original Estate Value
30
The Illustration
Max Funded Contract
Increased Face -Simulated Rates
7,000,000.00
MTAR
6,000,000.00
Account Value
5,000,000.00
$65,000 in taxes in year 30
4,000,000.00
3,000,000.00
2,000,000.00
1,000,000.00
0.00
1
15
$1,750,000 Original Estate Value
30
Why is this education important?
• Lawsuits!!
• E & O Claims
• Class Action Suits
• Public Image & Reputation
The Solution
• KYC
• Investment Objectives
• Risk Tolerance
MTAR Smoothing Features
• AIG
• Maritime Life/ Manu
• National
Risk #2 – Increase and Reversals??
• Minimized
• Fund Builder
• Optimized
• Calibrator
• Wealth Enhanced
• Accumulator
So Why is it Sold This Way?
• To accommodate the
“Illustration War”
• Lack of knowledge of the Risk
So Why is it Sold This Way?
Account Value
MTAR of “Minimized Policy”
Regulation 306 Prohibits more
than an 8% Increase.
Risk #3 - The 250% Rule
This rule is to discourage the use of an
insurance policy from sheltering large sums
of money from Inheritances, windfalls, etc.
The Anti Dump In Rule……….
The 250% Rule
Policies can not shelter any more than 250%
of the cash surrender value 3 years prior.
It starts in the 10th year and continues every
year thereafter……
…….and I mean every year
thereafter
The 250% Rule
Year 10
$25,000
CSV
Year 7
$10,000
CSV
The 250% Rule
Year 7
$10,000
CSV
Year 10
$45,000 =
20,000 in CSV
and 25,000
inheritance
The 250% Rule
Year 11
$25,000
Year 8
$14,000
CSV
Year 7
$10,000
CSV
Year 10
$8,000
The 250% Rule
Year 7
$14,000
CSV
Year 8
$10,000
CSV
Year 10
$20,000
Year 11
$25,000
Risk #4 – MER’s
• Are they guaranteed
• Do they include IIT
Risk #4 – 90%/110%
TSE 300
$1,350
Crediting Full Index & Dividends
Crediting Full Index No Dividends
Crediting Index With Div. - 90% up / 110% down weekly
$1,300
$1,250
$1,200
$1,150
$1,100
$1,050
$1,000
$950
Crediting Index With Div. - 90% up / 110% down daily
S&P 500 Results
$1,275
Crediting Full Index & Dividends
Crediting Full Index No Dividends
Crediting Index With Div. - 90% up / 110% down weekly
$1,225
$1,175
$1,125
$1,075
$1,025
$975
$925
Crediting Index With Div. - 90% up / 110% down daily
Risk #5 – Net Returns
•Index or Managed Funds????
•Value or Growth????
Do Investment Styles Truly
Perform Differently?
Last four years: S&P/Barra Value - S&P/Barra Growth
Deviation from the S&P 500
8.00%
S&P/Barra Growth
S&P/Barra Value
6.00%
4.00%
2.00%
0.00%
Dec-97
-2.00%
-4.00%
-6.00%
-8.00%
S&P500
Dec-98
Dec-99
Dec-00
Dec-01
Risk #5 – Net Returns
•Look at the period 1960 to 1982
•Dow Jones 550 grew to 1050
•Templeton
•1960 $9.10
•1982 $9.28
•1971 5/1 Stock Split
•1979 3/1 Stock Split
The Risks Associated with
“Universal Life”
And……How to avoid them!!!!
[email protected]
James Britton CFP
Thank You