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No Lapse PPT

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					Winning BIG With
Guarantees
 But Not Everything is Golden
    The Birth of Guarantees….

   In the 1990’s no-lapse secondary
    guarantees were created to…
       Jumpstart a stagnant UL life product
        market
       Accommodate consumers’ growing need
        for security
       Adjust to a rising economy coupled with
        bear stock market
    What is the Debate About?
   Carriers competing, sometimes with
    alleged overly aggressive pricing/
    assumptions
   Exaggerated possibility circulated by
    carriers not in this market who predict
    the downfall of any carrier marketing
    no-lapse products
   Ratings agencies and industry
    watchdogs heightening the concern
    Purpose of the Product
   Estate Planning
   Works in Pension Max
   Table 4 term (best with 20 yr) table shave
   Term to 100
    Examining No-Lapse Products

   Guaranteed death benefit
   Specified minimum premium that will
    guarantee death benefit
   Minimal cash value
   Not comparable to a savings account
    Understanding the Product
   Impact of policy modifications
       UL policy overall
       UL no lapse specifically
            Policy loans
                 face amount
            Switching DB option
            Rider additions

   Reinstatement provisions
   Catch up provisions
   One cannot buy a refrigerator and expect it to
    bake a cake!
Solvency Issues
   Aggressive pricing assumptions
   Portfolio yield
   Lapse rates
   Mortality rates
Regulator Response (NAIC)
   More stringent NAIC testing guidelines
   “Our pricing assumptions, including lapse
    assumptions are considered proprietary in nature.
    That being said, all of our universal life products,
    including LPR secondary guarantee products, meet
    the requirements of the National Association of
    Insurance Commissioners (NAIC) illustration testing
    (under which one test assumes no lapses after 5
    years)”                -Andrew Niedzielski, VP, Fixed Life
                            Business
                                    Lincoln Financial Group
Regulator Response (AXXX)
   Guideline AXXX specifically calls for
    companies selling no-lapse guarantees to
    establish reserve requirements using a
    mortality table and interest rates considerably
    lower than pricing and using a zero lapse
    assumption
   On the other hand, Moody’s describes a set-
    up of 7% yields, 6% lapse rates and 100%
    mortality as “good”
Regulator Response
   Why the discrepancy between guideline AXXX’s zero
    lapse rate and Moody’s 6% lapse rate?
       Ben Wolzenski, President, Actuarial Collaboration,
        notes, “That is because the assumptions required in
        statutory reserve calculations are conservative. This
        reflects the fact that the state regulatory authorities’
        primary duty is to ensure the solvency of insurance
        companies, not to facilitate lower prices for consumers.
        So a carrier might well assume, realistically, that there
        will be some lapses.”
XXX/AXXX Regulations
   Regulation XXX added reserving requirements
    to level term life insurance programs.
   Actuarial Guideline AXXX (effective 1/1/03),
    which increased the reserving basis on
    universal life policies with long-term
    secondary guarantees.
    (See tabs entitled “XXX/AXXX An Explanation”)
Industry Response
   Letters of Credit (LOC)
   Ongoing analysis and refinement
   Price adjustments
   Capital market solutions
       Moody’s states that, “there will be more capital
        market solutions developed in order to help
        companies meet the requirements.”
Carrier Wherewithal

   Specific comments of rating agencies
      (See tab entitled “Carrier Rating Reports”)
Fitch Ratings on AXA
   “The rating outlook for AXA is stable. Fitch ratings
    expects AXF (stock market symbol) to further
    strengthen its operating earnings due to pricing and
    expense controls. Despite strong growth, risk-based
    capital is expected to remain above 300% going
    forward, and leverage is expected to remain below
    25%. Fitch believes the subsidiaries of AXA/AXF will
    continue to receive parental support in order to
    facilitate acquisition or maintain the company’s
    current financial/ ratings position.”
Moody’s on John Hancock
   “John Hancock has one of the most
    carefully managed books of business in
    the industry and keeps its non-credit
    risk profile (liquidity, rollover/refinance,
    and interest rate risks) within tight pre-
    established tolerances.”
    Moody’s Manulife Report:
   ““Manulife sells universal life products which have long-term
    cost-of-insurance (COI) and ‘no-lapse’ guarantees. Regulation
    XXX was designed to make reserving practices for term and
    universal life insurance products with long-term level premiums
    more conservative. Regulation AXXX ,which is in effect for
    2003, addresses some forms of secondary guarantees found in
    universal life products not already captured by XXX, including
    those products with ‘no lapse’ guarantees. As is the case for
    many U.S. insurers offering these products, we expect
    there will be some impact on the company’s U.S.
    statutory results, but that on consolidated Canadian
    GAAP basis there should be no impact {emphasis
    added}”
    Overall review

   Revealed no definitive negative
    comments on other insurance carriers
    Validity of Individual Rating
    Reports

   Expression of opinions based on
    variable assumptions
   Predictions, not certainty
Due diligence
   Historical financials
   Current ratings
   Investment diversification
   Market focus
   Guarantee is only as good as the
    company offering it
    We Have Reassurances:
   Head pricing actuary must comply with NAIC standards to
    follow guidelines or face fines; insurance co. can lose
    credentials
   Even IF…pricing were to not meet all AXXX criteria, worst
    case scenario, insurance companies make lower profits,
    not necessarily become insolvent
   Lapse assumption pricing concerns have been addressed
    through NAIC guidelines under AXXX; however products
    including no-lapse are still being projected to stay on a
    company’s books for an average of 8-10 years
Fiduciary Responsibilities
   Annual reviews
   Education
   Ethical selling and placement
   If selling a company with 30 day
    reinstatement window, be sure to request the
    company sends billing 60-90 days before due
    dates
    (See tab entitled “Life Insurance Review”)
                     Case Study #1

    A Few Case Studies…
   Husband and wife (ages 71/68) bought
    4 SUL policies 1992-1996
   Purpose was estate liquidity
   Total premiums = $260,374
   Total cash value = $147,694
   $10M death benefit total
   Both husband and wife issued standard
                      Case Study #1

    Review revealed clients…
   Wanted cash value in policy in case
    estate tax repealed
   Would like to lower gifts to trust
   Could qualify for preferred non-smoking
    rate
   Some policies would lapse soon without
    increased premium
                            Case Study #1

    Action Proposed
   1035 all 4 policies into $10M secondary
    guaranteed UL product
   Results
       Lower annual premiums to $194,345 (reduced
        from $260,374)
       Client saves $66,029 per year
       Cash surrender value on current non-guaranteed
        factors= $1,052,087
                           Case Study #2

    Loan Rollover
   Male, age 70, $500,000 Face Existing
    Policy
       Gross Cash Value= $247,318
       Outstanding Loan=$110,576
       In-force projection: Lapses in 7 years at
        age 77 on current factors
   1035 Exchange into a secondary
    guaranteed loan rollover product
                        Case Study #2

Loan Rollover
   Result:
      Loan not repaid; loan interest charged=

       policy crediting rate on loaned cash value
      No further planned premiums

      $500,000 death benefit; db at issue net of

       loan= $389,424
      Even with loan outstanding, policy stays in

       force until age 110 on a guaranteed basis
                              Case Study #3

    Jumbo Loan Rollover
   Male, age 66, SNT, $75M face policy, $25M
    CV
       $12.5M outstanding loan
       Policy reprojections show lapse within 5 years on
        current factors
       Goals: avoid “phantom income” and maintain net
        level db of $62.5M
   1035 into guaranteed product, no loan
    repayment
                              Case Study #3

    Jumbo Loan Rollover
   Results
       Maintained guaranteed net level db of
        $62.5
       No phantom income with guaranteed db
           Annual cash outlay to keep guaranteed level
            death benefit at $62.5M ($75M – 12.5M)=
            $1,003,959 (premium + loan interest)
     David W. Simbro, FSA,
     Northwestern Mutual

   “Will the rebirth of fixed life products via
    UL/SG work financially for insurance
    companies: Insurance companies are paid
    to take risks. Whether the prices they
    charge are sufficient for the risks they take
    can only be known over time, as
    experience unfolds.”
    Moody’s Special Comments
                                           - July 2004

   “We believe that long-term winners in this market
    will have a full understanding of their exposure to
    secondary guarantees, will exhibit pricing discipline
    and will have addressed the potential problem of
    reserve strain well ahead of the time it could
    become an issue for the company.”
    For individual company product information see tab entitled
      “Company Product Information”
 NLG vs. Current Scenario
 Valued Male, Age 45                           Preferred Non-Smoker
                                               DB $1,000,000
Solving for premiums being paid all years       Solving for premiums being paid all years
  for a Fully Guaranteed Death Benefit            for a CV as close to $1.00 at maturity
 Company         Product       Premium       Company           Product          Premium
                 Contin UL      $8,399
                                                                                  $8,452
 Amer. Gen.       Elite G       $9,187       Amer. Gen.        Elite 03
                                                                                 (4.85%)
                Protector G     $8,600
               JFP Legend
                                $9,308
                300 Plus                                     JPF Legend           $7,962
  Jeff Pilot                                  Jeff Pilot
               JPF Legend                                        300             (4.85%)
                                $8,799
                 300 XG
                                                                                  $7,581
  Linc. Life     UL-LPR5        $8,447        Linc. Life       UL-DB
                                                                                 (4.50%)
                                                                                  $8,484
Manulife/ JH     ULG (04)       $10,520     Manulife/ JH   Performance UL
                                                                                 (5.40%)
                                                                                  $7,768
MONY/ Equi       Athena II      $8,390      MONY/ Equi        Athena II
                                                                                 (4.75%)
                                                                                   $6,502
  Sun Life     Protector LP2    $8,794        Sun Life      Protector Plus     (yrs1-9 5.35%
                                                                              yrs 10+ 5.85%)
               TransACE EX      $9,050                                            $8,669
TransAmerica                                TransAmerica    Trans Ultra EX
               TransACE GL      $9,050                                           (4.75%)

                                                                                  $7,210
 Travelers         MVP          $8,041        Travelers         MVP          (yrs 1-10 4.65%
                                                                             yrs 10+ 5.15%)
 NLG vs. Current Scenario
 Valued Male, Age 45                            Standard Non-Smoker
                                                DB $1,000,000
Solving for premiums being paid all years      Solving for premiums being paid all years
  for a Fully Guaranteed Death Benefit           for a CV as close to $1.00 at maturity
 Company          Product      Premium       Company          Product           Premium
                 Contin UL       $9,851
                                                                               $10,704
 Amer. Gen.       Elite G       $11,207      Amer. Gen.       Elite 03
                                                                               (4.85%)
                Protector G      $9,900
               JFP Legend
                                $11,540
                300 Plus                                    JPF Legend           $9,462
  Jeff Pilot                                  Jeff Pilot
               JPF Legend                                       300             (4.85%)
                                $10,091
                 300 XG
                                                                                 $9,883
  Linc. Life     UL-LPR5        $9,744        Linc. Life       UL-DB
                                                                                (4.50%)
                                                                               $10,066
Manulife/ JH     ULG (04)       $12,413     Manulife/ JH   Performance UL
                                                                               (5.40%)
                                                                                 $9,533
MONY/ Equi       Athena II      $9,447      MONY/ Equi        Athena II
                                                                                (4.75%)
                                                                                 $8,357
  Sun Life     Protector LP2    $10,081       Sun Life     Protector Plus    (yrs1-9 5.35%
                                                                            yrs 10+ 5.85%)
               TransACE EX      $11,540                                        $10,646
TransAmerica                                TransAmerica   Trans Ultra EX
               TransACE GL      $11,540                                        (4.75%)
                                                                                 $9,494
 Travelers         MVP          $9,157        Travelers         MVP         (yrs 1-10 4.65%
                                                                            yrs 10+ 5.15%)
 NLG vs. Current Scenario
 Valued Male, Age 55                             Preferred Non-Smoker
                                                 DB $1,000,000
Solving for premiums being paid all years      Solving for premiums being paid all years
 Company         Product      Premium        Company          Product          Premium
                 Contin UL      $12,676
                                                                               $13,997
 Amer. Gen.       Elite G       $14,473      Amer. Gen.       Elite 03
                                                                               (4.85%)
                Protector G     $12,900
               JFP Legend
                                $14,423
                300 Plus                                    JPF Legend         $13,911
  Jeff Pilot                                  Jeff Pilot
               JPF Legend                                       300            (4.85%)
                                $13,617
                 300 XG
                                                                               $11,888
  Linc. Life     UL-LPR5        $12,974       Linc. Life       UL-DB
                                                                               (4.50%)
                                                                               $13,418
Manulife/ JH     ULG (04)       $12,866     Manulife/ JH   Performance UL
                                                                               (5.40%)
                                                                               $12,666
MONY/ Equi       Athena II      $12,575     MONY/ Equi        Athena II
                                                                               (4.75%)
                                                                                $11,007
  Sun Life     Protector LP2    $12,925       Sun Life     Protector Plus    (yrs1-9 5.35%
                                                                            yrs 10+ 5.85%)
               TransACE EX      $14,100                                        $13,774
TransAmerica                                TransAmerica   Trans Ultra EX
               TransACE GL      $14,100                                        (4.75%)

                                                                                $11,774
 Travelers         MVP          $12,297       Travelers         MVP         (yrs 1-10 4.65%
                                                                            yrs 10+ 5.15%)
 NLG vs. Current Scenario
 Valued Male, Age 55                             Standard Non-Smoker
                                                 DB $1,000,000
Solving for premiums being paid all years      Solving for premiums being paid all years
 Company         Product      Premium        Company          Product          Premium
                 Contin UL      $15,592
                                                                               $17,896
 Amer. Gen.       Elite G       $17,203      Amer. Gen.       Elite 03
                                                                               (4.85%)
                Protector G     $16,000
               JFP Legend
                                $16,940
                300 Plus                                    JPF Legend         $16,145
  Jeff Pilot                                  Jeff Pilot
               JPF Legend                                       300            (4.85%)
                                $16,037
                 300 XG

                                                                               $16,144
  Linc. Life     UL-LPR5        $16,230       Linc. Life       UL-DB
                                                                               (4.50%)

                                                                               $16,958
Manulife/ JH     ULG (04)       $18,506     Manulife/ JH   Performance UL
                                                                               (5.40%)
                                                                               $15,563
MONY/ Equi       Athena II      $15,165     MONY/ Equi        Athena II
                                                                               (4.75%)
                                                                                $14,175
  Sun Life     Protector LP2    $16,749       Sun Life     Protector Plus    (yrs1-9 5.35%
                                                                            yrs 10+ 5.85%)
               TransACE EX      $17,500                                        $16,995
TransAmerica                                TransAmerica   Trans Ultra EX
               TransACE GL      $17,500                                        (4.75%)

                                                                                $15,535
 Travelers         MVP          $16,035       Travelers         MVP         (yrs 1-10 4.65%
                                                                            yrs 10+ 5.15%)
    Baker Associates
   For more information contact our
    sales staff:
     Email us at: info@bakco.com
     Call us at: 1-888-899-6599
   www.bakco.com
  One Final Thought…
• Why are the companies that
  are raising the red flags not
  carrying no-lapse products?

                  Thank you


         Baker Associates
         7502 E Pinnacle Peak Rd, Ste 116B
         Scottsdale, AZ 85255

				
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