LIFE MODULE III Farmers Flexible Universal Life 1242020

LIFE MODULE - III Farmers Flexible Universal Life 12/4/2020 1

Module Objections n n n Intro to Univ. Life Policy Description Premium Flexibility Interest Rate Policy Funding Death Benefit Options 12/4/2020 n n n Changes in Principle Sum Policy Loans Partial Surrenders (Withdrawals) TAMRA Guideline Maximum Premium 2

What is Universal Life? Universal Life was created in the late 1970’s in response to high inflation rates and investment strategies centered around the “buy term and invest the difference” concept. Universal life is a flexible premium product providing adjustable, low cost protection and cash values which earn interest at current rates (interest sensitive). The premium is flexible within certain limits. Generally, the contract has certain minimum premiums that may be required for a stated period of time and there is a maximum premium that limits the amount a policy owner may pay. 12/4/2020 3

What is Universal Life? When premium payments are made, a charge or “load” is deducted to cover sales and administrative expenses. This charge is usually a percentage of the premium paid or a set dollar amount. When this charge is deducted from the premium paid, the net amount goes into the accumulation account. This accumulation account is free of current income tax (tax deferred). Each month the company deducts from the accumulation account, an amount necessary to cover the “term insurance” cost of providing the death benefit for that month. They may also deduct an administrative fee. The balance stays in the account and earns interest. 12/4/2020 4

What is Universal Life? Use Caution - Because the cost of protection increases each year, if not funded properly, the policy will cancel for not enough funds. Many agent’s sell the FFUL using the minimum premium amount explaining to the insured’s that more money will need to be paid in the future. Unfortunately, many insured’s forget the conversation, believing the premium was fixed. To avoid this situation, try to sell the FFUL using the target or life-time coverage premiums. 12/4/2020 5

What is Universal Life? Below is an illustration of what happens to an inadequately funded Universal Life policy: Optional NOTE: As the insured ages, the cash value is needed to offset the amount of monies needed to keep the policy in force. 100 K Monthly Payments Cash Value Age 35 12/4/2020 45 55 65 75 85 95 6

Premium Flexibility The client may change the amount and/or timing of premium payments any time after the first year. Premium payments may even be eliminated as long as there is sufficient cash in the accumulation account (less any policy loans) to cover the monthly cost of insurance and administration expense charge. 12/4/2020 7

Interest n n Current Interest Rate (6. 00%) • The current interest rate is determined by the company and reflects the most up-todate investment market conditions and compares favorably with Money Market rates. Guaranteed Interest Rate • The guaranteed interest rate is 4. 50 percent compounded annually. The interest rate can never be less than the guaranteed minimum. 12/4/2020 8

Policy Funding n n n Premium payments go directly into the accumulation account after deducting the 4% fee. At the beginning of each month, a charge is deducted from the accumulation account for the “pure cost of insurance” plus the cost of any riders The balance in the accumulation account is then credited with the current rate of interest. 12/4/2020 9

Death Benefit Options n Option A - Increasing n The total death benefit equals the Principle Sum plus the accumulation account. n Option B - Level n The total death benefit is the current principle sum, unless increased by IRS guidelines. With this option, the “pure insurance” decreases as the accumulation account increases. 12/4/2020 10

Death Benefit Options “The Corridor” The policy always needs to contain a certain amount of “pure insurance” in order to maintain its “life insurance” status for favorable tax treatment. This amount is known as the “corridor. ” When the accumulation account increases to the point of nearing the death benefit, the death benefit will automatically increase to maintain this corridor. 12/4/2020 11

The Corridor Total Death Benefit Pure Insurance Accumulation Account Total Death Benefit must always be: 40 and under 250% of accumulation account 41 - 89 % decreases each year until 90 90 125% of accumulation account 91 - 94 decreases by 1% yearly 95 100% 12/4/2020 12

Changing Death Benefit Options n The Death Benefit option can be changed after the first policy year. No more than one change per year. n When changing from A to B, the current amount of the total death benefit is frozen making it the new principle sum. n When changing from B to A, the current net insurance amount (death benefit less the accumulation account) becomes the new principle sum. Be careful when making this change. A surrender charge may apply. 12/4/2020 13

Changing the Principle Sum n Changes to the principle sum are allowed after the first policy year subject to the following rules: • New principle sum must be at least $25, 000 • Increases require evidence of insurability • Change is subject to IRS guidelines • A surrender charge may apply to decreases, if within the first nine years. • Minimum increase is $10, 000 • No more than one change per year 12/4/2020 14

Policy Loans n n n n Policy loans are available for all or part of the loan value provided that the policy has a cash value. The loan value is the cash value less: (1) loan interest (2) three monthly deductions for policy costs. Maximum loan interest rate is 8% Income tax free Money comes from the company with a collateral assignment on the cash value. Cash value continues to earn current interest rates. If loan not repaid by time of death, the loan amount will be deducted from the total death benefit paid. 12/4/2020 15

Partial & Complete Surrenders n n n A portion of the cash value may also be available through a partial surrender. To exercise this option, the owner withdraws the desired portion of the cash value directly from the policy. Generally a fee charged While loan has a temporary effect on a policy, restoring everything affected by the loan, the same is not said of a partial surrender. Especially so with a Death Benefit B Option. Repayment is treated as new premium, subjecting it to loads. 12/4/2020 16

Selling Strategies Because of the flexibility of the monthly payments which offers a minimum, target and maximum amount, the FFUL can be a policy to fit most people’s budget. However, when compared to a Premier Whole Life policy, the PWL usually out-performs the FFUL guarantees in the long term. The FFUL is an excellent tool to accumulate cash for children. Let’s look at a few proposals. 12/4/2020 17

Prepare for Next Class: Farmers Whole Life Products 12/4/2020 18

Quote of the Day. . “Discipline is the habit of taking consistent action until one can perform with unconscious competence. Discipline weighs ounces but regret weighs tons. ” Jhoon Rhee 12/4/2020 19