1. 13 - 1  Characteristics  Provides protection for the entire lifetime  Level or fixed periodic premiums payable for the lifetime of the insured  Level and fixed death benefit  Fixed schedule of guaranteed cash surrender values that increase of a period of time  These cash value can be borrowed by the policyowner at any time Chapter 13 Tools & Techniques of Life Insurance Planning Ordinary Level Premium Whole Life Insurance

2. 13 - 2 Ordinary Level Premium Whole Life Insurance  When is the use of this tool indicated?  Provide income for dependant family members  Liquidate consumer or business debts or mortgages  Fund college education  Cash for federal and estate tax needs  Fund a business continuation agreement  Key employee coverage  Help recruit, retain and reward key employees through a salary continuation plan Chapter 13 Tools & Techniques of Life Insurance Planning

3. 13 - 3  When is the use of this tool indicated? (cont'd)  For split dollar agreement  Fund bequests of capital to children, grandchildren  Fund charitable bequests  Preserve confidentiality of financial affairs  Assure nearly instant access of cash for surviving dependants  Direct family assets to family members in a tax efficient manner  When the need is long term and there is a desire for a level fixed premium  Financing post-retirement health insurance for select executives Chapter 13 Tools & Techniques of Life Insurance Planning Ordinary Level Premium Whole Life Insurance

4. 13 - 4  Advantages  Fixed and known premium  Guaranteed ceiling on mortality and expense charges  Guaranteed floor on interest credited to cash values  Cash values grow income-tax deferred  Frequently pays a higher effective interest rate than tax free municipal bonds  Through a combination of guaranteed cash values and dividends  Cash values not subject to same market risk as longer term municipal bonds and other long- term fixed investments  Cash values can be borrowed at low net cost  Proceeds not typically part of the probate estate Chapter 13 Tools & Techniques of Life Insurance Planning Ordinary Level Premium Whole Life Insurance

5. 13 - 5  Advantages (cont'd)  Proceeds not typically part of the probate estate  No public record of death benefit amount nor to whom it is paid  Proceeds are generally not subject to federal estate taxation  Life insurance policies can be used as collateral for a loan  Disadvantages  Premiums may be unaffordable  Higher cost than term for the same coverage, in the early years  Term may be ultimately more expensive later on Chapter 13 Tools & Techniques of Life Insurance Planning Ordinary Level Premium Whole Life Insurance

6. 13 - 6  Disadvantages (cont'd)  Significant surrender charges in the early years  Interest on policy loans is generally not tax deductible  Limited hedge against inflation with guaranteed cash value  Dividends (Non-guaranteed) will help  Rate of return on cash value is not favorable as compared to other alternative investments Chapter 13 Tools & Techniques of Life Insurance Planning Ordinary Level Premium Whole Life Insurance

7. 13 - 7  Tax Implications  General tax rules  Death benefits income tax free  Death benefits subject to same income, estate, gift and generation skipping transfer taxation rules as all other types of life insurance  Taxation of living proceeds  Governed by IRC section 72  Payments separated into 3 categories  Annuity payments  Payments of interest only  Amounts not received as an annuity Chapter 13 Tools & Techniques of Life Insurance Planning Ordinary Level Premium Whole Life Insurance

8. 13 - 8  Tax Implications (cont'd)  Annuity payments  Periodic payments received in a systematic liquidation of cash value  Each payment is treated partially as recovery of investment and partially as taxable interest  Once entire investment has been recovered, any further payments are treated entirely as taxable income  Payments of interest only  Taxable income whether distributed or credited to account Chapter 13 Tools & Techniques of Life Insurance Planning Ordinary Level Premium Whole Life Insurance

9. 13 - 9  Tax Implications (cont'd)  Amounts not received as an annuity  Taxed under the “cost recovery rule”  Included in gross income only to the extent they exceed the investment in the contract  Exceptions  Modified Endowment Contracts  Cash distributions taxed under the interest first rule  Loan Proceeds  If a loan is outstanding when a policy is surrendered, gains in the contract are immediately recognized Chapter 13 Tools & Techniques of Life Insurance Planning Ordinary Level Premium Whole Life Insurance

10. 13 - 10  Alternatives  Combination of level premium deferred annuity and decreasing term insurance  Distributions from annuity taxed under the interest first rule  Term portion may require increasing premium contributions to cover the increasing mortality risk  Combination of investments in tax free municipal bonds and decreasing term insurance  Interest paid on debt secured by municipal bonds is not tax deductible  A universal life policy configured as a level premium policy  Mortality costs and expenses could be increased Chapter 13 Tools & Techniques of Life Insurance Planning Ordinary Level Premium Whole Life Insurance

11. 13 - 11  Evaluating dividend paid on par policies  Compare current crediting rate and length of guarantees  Compare current mortality and expenses to guarantees levels of mortality and expenses  Look at bailout provisions that reduce or eliminate surrender charges if investment performance does not meet reasonable guidelines  Check policy loan provision for level of interest credited to borrowed versus non- borrowed cash values  Check financial soundness of carrier Chapter 13 Tools & Techniques of Life Insurance Planning Ordinary Level Premium Whole Life Insurance