Indexed Universal Life vs. Various Financial Alternatives For Harvey Pierce, MD

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Eileen Burns
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1 For Harvey Pierce, MD Presented By: [Licensed user's name appears here]

2 Preface A decision to acquire additional life insurance can represent one of several significant phases in your overall financial planning. An important part of this decision involves the comparison of the life insurance policy to alternative investment possibilities. To help you make an informed decision about acquiring the policy, the accompanying presentation shows financial data regarding life insurance compared to these alternatives: Tax Exempt ; ; Tax Deductible Retirement Plan (). The study offers information from which you and your advisers can draw informed conclusions about the suitability of either plan. Following are major features of the life insurance policy for you to consider as part of your overall assessment: 1. Income tax free death benefits; 2. Probate free death benefits; 3. Accumulating cash values; 4. Income tax deferred growth of cash values; 5. Competitive current interest rate; 6. Tax free access to cash values via policy loans; 7. Privacy of all transactions. Favorable income tax consequences combine with significant policy values and benefits to produce a life insurance solution that has a considerable amount of financial leverage. Payments Cumulative Payments Indexed Universal Life Cum. A/T Cash Value Death Benefit $3,362,136 $474,34 Yrs Yrs $1,287,28 $787,28 Various Financial Alternatives Cumulative Tax Exempt Values Tax Exempt $1,667,55 $745,42 $71,87 Yrs $ Yrs This graphic assumes the non-guaranteed values shown continue in all years. This is not likely, and actual results may be more or less favorable. Page 1

3 Flow Chart Various Financial Alternatives Indexed Universal Life Tax Exempt Indexed UL Net Net Payment Payment Living Living Death Values Values Benefit Comparative Analysis Page 2

4 Comparison of Values Tax Exempt 3.% 6.% 7.5% Income Tax Rate 4.% Indexed UL Interest Rate 7.5% Initial Death Benefit 5, Values of Identical Allocation to Various Financial Alternatives Indexed UL Yr Male Age (1) Life Insurance Premium (2a) from Tax Exempt (2b) Tax Exempt (3a) from (3b) (4a) from (4b) Value of if Distributed (5a) Policy Loan Proceeds (5b) Accum Value* (5c) Cash Value* (5d) Death Benefit ,717 24,355 24,42 21,34 21,414 6, , ,717 49,366 49,564 43,42 44,344 31, , ,717 75,5 75,453 67,244 68,921 57, , ,717 11,424 12,19 92,598 95,283 85,18 595, , ,59 129, , , , , , , , , ,34 146, , , , , ,86 186, ,12 686, , , , , , ,38 722, , , , ,1 26,72 257,797 76, , , , ,84 32,81 3,631 82, ,717 37,27 312, ,47 348, , , , , , , , , , , ,14 38,532 48, ,8 451,8 951, ,717 47, , ,437 58,76 58,76 1,8, , , ,988 55, , ,312 1,69, , ,131 49, , , ,981 1,134, , , ,83 739,472 75,42 75,42 1,25, , ,63 569, ,224 78,98 78,98 1,28, , ,91 611, ,65 861, ,854 1,361, , , , ,51 948,62 948,62 1,448, , ,713 64,857 66,375 64, ,481 64, , ,353 1,434, ,73 53,923 67,73 554,638 67,73 955,46 67,73 92,323 92,323 1,42, , ,675 7, ,35 7, ,677 7,634 96,655 96,655 1,46, ,653 49,76 73, ,285 73, ,794 73, , ,479 1,393, , ,958 76, ,28 76,763 91,453 76,763 88,946 88,946 1,38, , ,42 79, ,874 79, ,268 79, , ,212 1,369, ,265 19,776 83, ,29 83, ,825 83, , ,567 1,358, ,663 16,915 86,663 14,48 86,663 83,681 86, , ,236 1,349, ,163 17,23 9,163 51,735 9, ,361 9, , ,463 1,341, ,23 51,735 93,768 78,358 93, , ,516 1,335, ,34 71,87 745,42 787, ,435 *This is an InsMark supplemental illustration for indexed universal life. In an actual presentation, this footnote refers to an accompanying basic illustration from a specific life insurance company with important details, caveats, and guarantees. See the accompanying reports for year-by-year details: Details of the Tax Deductible Retirement Plan () Management fees reflected in columns (2b), (3b) & (4b): TxEx =.3%, Txbl =.6%, = 1.% Page 3

5 Comparison of Values Tax Exempt 3.% 6.% 7.5% Income Tax Rate 4.% Indexed UL Interest Rate 7.5% Initial Death Benefit 5, Values of Identical Allocation to Various Financial Alternatives Indexed UL Yr Male Age (1) Life Insurance Premium (2a) from Tax Exempt (2b) Tax Exempt (3a) from (3b) (4a) from (4b) Value of if Distributed (5a) Policy Loan Proceeds (5b) Accum Value* (5c) Cash Value* (5d) Death Benefit ,482 65,124 97, , ,686 1,331, ,36 584,8 11,36 83,267 83,267 1,33, ,246 59,599 15, , ,593 1,331, ,33 426,14 19,33 836,22 836,22 1,336, , , , ,94 843,94 1,343, , , , , ,763 1,355, , , , , ,121 1,372, , , , ,553 1,393, ,491 92,644 92,644 1,42, , , ,993 1,453, , , ,938 1,429, ,326 97,917 97,917 1,47, , , ,878 1,387, , , ,739 1,369, , , ,371 1,353, , , ,531 1,338, , , ,855 1,324, , ,99 811,99 1,311, , , ,568 1,299, , ,28 787,28 1,287,28 474,34 71,87 745,42 1,667,55 3,362,136 *This is an InsMark supplemental illustration for indexed universal life. In an actual presentation, this footnote refers to an accompanying basic illustration from a specific life insurance company with important details, caveats, and guarantees. See the accompanying reports for year-by-year details: Details of the Tax Deductible Retirement Plan () Management fees reflected in columns (2b), (3b) & (4b): TxEx =.3%, Txbl =.6%, = 1.% Page 4

6 Tax Deductible Retirement Plan () Details 7.5% Income Tax Rate 4.% Year Male Age (1) Tax Deductible Deposits to the (2) Equivalent of Deposit (3) Withdrawal from the * (4) Value of (5) Value of if Distributed (6) Death Benefit of ,528 23,717 42,68 21,34 25, ,528 23,717 86,839 43,42 52, ,528 23, ,487 67,244 8, ,528 23, ,195 92, , ,528 23, , , , ,528 23, , , , ,528 23, , ,86 214, ,528 23, , , , ,528 23, ,1 246,1 295, ,528 23, ,68 282,84 339, ,528 23, ,93 322,47 386, ,528 23, , , , ,528 23, ,356 48, , ,528 23,717 91, , , ,528 23,717 1,11,465 55,733 66, ,528 23,717 1,118,52 671, , ,528 23,717 1,232, , , ,528 23,717 1,353,76 812, , ,528 23,717 1,482,75 889,65 889, ,528 23,717 1,62,85 972,51 972, ,857 1,69, , , ,73 1,592, ,46 955, ,634 1,569, , , ,653 1,539, , , ,763 1,52,422 91,453 91, ,966 1,457, , , ,265 1,43,41 841, , ,663 1,339,468 83,681 83, ,163 1,265,62 759, , ,768 1,18,596 78,358 78,358 79,56 474,34 787,435 * withdrawal has been grossed up to account for the income tax required to produce the after tax number shown in Column (3). 3 Year Summary Management fees reflected in column (4): 1.% Note: The illustration for the Annual Deposit for the tax deductible retirement plan () is hypothetical as such a plan generally involves additional participants requiring increased deposits. Payments 474,34 787,435 Living Values 78,358 Death Benefit 78,358 Page 5

7 Tax Deductible Retirement Plan () Details 7.5% Income Tax Rate 4.% Year Male Age (1) Tax Deductible Deposits to the (2) Equivalent of Deposit (3) Withdrawal from the * (4) Value of (5) Value of if Distributed (6) Death Benefit of ,482 1,83,54 65,124 65, ,36 973, ,8 584, , ,331 59,599 59, ,33 71,24 426,14 426, , , , , , ,46 228, , , , , , , ,56 474,34 1,667,55 * withdrawal has been grossed up to account for the income tax required to produce the after tax number shown in Column (3). 5 Year Summary Management fees reflected in column (4): 1.% Note: The illustration for the Annual Deposit for the tax deductible retirement plan () is hypothetical as such a plan generally involves additional participants requiring increased deposits. Payments 474,34 1,667,55 Living Values Death Benefit Page 6

8 Matching Values Tax Exempt 3.% 6.% 7.5% Income Tax Rate 4.% Indexed UL Interest Rate 7.5% Initial Death Benefit 5, Gross Interest Rate needed by Various Investments over 5 Years to Match Indexed UL Policy Values Investment Interest Rate Indexed UL Tax Exempt 8.55% Accumulation Value $787,28 Tax Exempt 8.55% Cash Value $787,28 Tax Exempt 8.71% Death Benefit $1,287, % Accumulation Value $787, % Cash Value $787, % Death Benefit $1,287, % Accumulation Value $787, % Cash Value $787, % Death Benefit $1,287,28 Tax Exempt $787,28 $1,287,28 $787, % Required To Match CV $1,287, % Required To Match DB 14.85% Required To Match CV 15.12% Required To Match DB $787, % Required To Match CV $1,287, % Required To Match DB Income Tax Considerations 1. Tax Exempt : Interest is tax exempt. 2. : Interest is taxed as earned. 3. : Interest is taxed as earned. 4. Indexed Universal Life: a. Death Benefit including cash value component is income tax free. b. Loans are income tax free as long as the policy is kept in force. c. Withdrawals and other non-loan policy cash flow up to cost basis (not in violation of IRC Section 772) are income tax free as a return of premium. d. Cash values shown assume most favorable combination of b and/or c. This is an InsMark supplemental illustration for indexed universal life. In an actual presentation, this footnote refers to an accompanying basic illustration from a specific life insurance company with important details, caveats, and guarantees. Page 7

9 A Look at Year 5 Various Financial Alternatives Indexed Universal Life Cumulative 474,34 Payments 474,34 Cumulative 71,87 745,42 1,667,55 3,362,136 TE TA TD TA Value Cash Value 787,28 1,287,28 Death Benefit TE Value TD Value TE TA TD - Tax Exempt - - Tax Deductible Retirement Plan () Page 8

10 5 Year Analysis Payments Indexed Universal Life Cumulative Payments Cum. A/T Cash Value Death Benefit $3,362,136 $474,34 Yrs $1,287,28 $787,28 Yrs Various Financial Alternatives Cumulative Values Tax Exempt Tax Exempt $1,667,55 $745,42 $71,87 Yrs $ Yrs Page 9

11 5 Year Comparison to Tax Exempt $1,6, $1,287,28 $1,2, $8, $787,28 $4, $474,34 $ $ Years At Year 5 Cumulative Payments $474,34 Tax Exempt Values $ Cash Value of Indexed UL $787,28 Death Benefit of Indexed UL $1,287,28 Page 1

12 5 Year Comparison to $1,6, $1,287,28 $1,2, $8, $787,28 $4, $474,34 $ $ Years At Year 5 Cumulative Payments $474,34 Values $ Cash Value of Indexed UL $787,28 Death Benefit of Indexed UL $1,287,28 Page 11

13 5 Year Comparison to a Tax Deductible Retirement Plan () $1,6, $1,287,28 $1,2, $8, $787,28 $4, $474,34 $ $ Years At Year 5 Cumulative Payments $474,34 Tax Deductible Retirement Plan () Values $ Cash Value of Indexed UL $787,28 Death Benefit of Indexed UL $1,287,28 Page 12

14 Tax Deferred Tax Calculations The Tax Deferred Retirement Plan () illustrated in the accompanying material reflects after tax values. Since all withdrawals are taxable, account values are illustrated on an after tax basis. A cash value life insurance policy (that is not designed as a modified endowment contract*) is taxed on a first-in-first-out basis which means that withdrawals (also known as partial surrenders) have different taxation. Withdrawals up to cost basis are tax free; subsequent withdrawals are taxable. However, contractual loan provision in the policy allow you to access additional cash flow from the policy cash value which is tax free so long as the policy stays in force. This feature avoids the problem of taxable withdrawals in excess of cost basis. Interest on such loans can be added to the outstanding loan, and with most life insurance policies, the loan balance is credited with interest earnings at (or near) the level of the loan interest charged resulting in a wash (or near wash) of the loan interest. If the policy is kept in force until death, the policy death benefit, including any internal deferred gain, is income tax free. Policy loans reduce policy cash values and death benefits, and the lapse of a loaned policy could result in severe tax ramifications to the policy owner. Be sure to consult a professional tax adviser if you have any questions about this. *With a life insurance policy that is characterized as a modified endowment contract ("MEC"), both withdrawals and loans are taxed on a gain first basis. In almost all circumstances, it is advisable to avoid purchasing a MEC, and the basic illustration that is provided to you from the issuing life insurance company should indicate if it is a MEC. Legal and tax information is for general use only and may not be applicable to specific circumstances. Clients should consult their own legal, tax and accounting advisors to assist in the evaluation of any potential transaction or strategy. Page 13

Indexed Universal Life vs. A Tax Deductible Retirement Plan (TDRP) For Joe Tanner. Presented By: [Licensed user's name appears here]

Indexed Universal Life vs. A Tax Deductible Retirement Plan () For Joe Tanner Presented By: [Licensed user's name appears here] Indexed Universal Life vs. A Tax Deductible Retirement Plan () Preface A