6/2/2016. Thanks. Question #2 What s different between Fiduciary O/S and Life Insurance Industry O/S? differing rates.

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2 Thanks Question #1 What does it take to become a licensed life insurance agent and how to choose? Licensure Designations Compensation Conflicts Operating System (O/S) Adopted The goals and updated are to ensure to address that illustrations lack of do uniform not mislead practice purchasers [resulting of insurance in] illustrations and to make that use an [apparently] illustrations more identical understandable. crediting approach yet illustrate differing rates. 2

3 Duty to investigate. Subsection (d) carries forward the traditional responsibility of the fiduciary investor to examine information likely to bear importantly on the value or the security of an investment. SECTION 7. INVESTMENT COSTS a trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee. SECTION 2. RISK AND RETURN OBJECTIVES a trustee shall [have] an overall investment strategy [with] risk and return objectives reasonably suited to the trust and consider the expected total return. 3

4 FINRA Rule 2210(d) Any comparison must disclose all FINRA material Rule differences including IM (c) It is investment inappropriate objectives, to costs compare and expenses, a life [etc] [because] insurance policy with omission another would product cause based the on communications hypothetical performance to be misleading. FINAL REPORT OF THE TASK FORCE FOR RESEARCH ON LIFE INSURANCE SALES ILLUSTRATIONS Illustrations should not be used for comparative policy performance purposes because doing so is fundamentally inappropriate. OCC Handbook This policy illustration is subject to a high degree of fluctuation. 4

5 Cochran v. Keybank French v. Wachovia Larry King v. Agent Schneider v. Attorney Vagelos v. Stockbroker Nacchio v. Goldman Sachs Question #3 Is anything needed beyond term life insurance? Fixed Premium/Duration Term Flexible Premium/Duration Term Coverage Duration Life Expectancy Convertibility 5

6 Question #4 What are the choices beyond term life insurance? Whole Life (WL) Universal Life Current Assumption (CAUL) Guaranteed Universal Life (GUL) [Equity] Indexed Universal Life ([E]IUL) Variable Universal Life (VUL) Private Placement (PPVUL) Invested Assets underlying Cash Values required Hybrids to be invested in high-grade bonds and government-backed mortgages. Question #4 What are the choices beyond term life insurance and how to choose? R - Risk Tolerances of Client A - Assets & Asset Class Preferences T - Time Horizons E - Expected Outcomes Question #5 Under what circumstances can/should premiums change? Despite a confusing variety of products & terminology, the premiums for ALL life insurance products are a function of 1. Cost of Insurance charges (COIs) for death benefits claims; 2. Policy expenses (E) for actuarial design, marketing, COIs distribution, underwriting + & administration; E - i% and 3. Investment earnings (i%) on premiums in excess of #1 and #2. 6

7 Question #5 Under what circumstances can/should premiums change? Actual policy earnings are less than expected Actual policy costs are more than expected Changes in life expectancy Question #5 Under what circumstances can/should premiums change and how to manage? Avoid comparing illustrations of hypothetical policy values for product selection. Remember illustrations are NOT quotes (unless premium are guaranteed). Confirm expected policy earnings are consistent with actual historical performance. Confirm expected policy costs are based on actual mortality and operating experience. Monte Carlo Simulations 7

8 1. Cost of Insurance (COI) charges for death benefits (i.e., 85% +/- of total costs); 1. Cost of Insurance (COI) charges for death benefits (i.e., 85% +/- of total costs); 2. Policy Expenses for actuarial, design, marketing, distribution, underwriting & administration; and 1. Cost of Insurance (COI) charges for death benefits (i.e., 85% +/- of total costs); 2. Policy Expenses for actuarial, design, marketing, distribution, underwriting & administration; and 3. Premium Loads for State Premium Taxes, Federal DAC Taxes and Sales Loads/ Commissions. 8

9 80% Variance Benchmark Average Costs Worst-Available WART Rates & Terms 40% Average WART 40% Average Best-Available BART Rates & Terms 40% 9

10 Reduce Premiums Increase Death Benefits Reduce Premium Call Risk Extend Coverage Duration Pay Trustee Fees WART Average BART Question #7 What rate of return is reasonable to use in calculating premiums and cash values? Illustrated Rates vs. Actual Historical Returns Risk Profile Asset Allocation (Equities/Fixed-Income) Product Type Rates of Return Reasonable to Expect Conservative 20% / 80% CAUL/GUL/WL 5% - 6% Moderate-Conservative 40% / 60% IUL/IWL 6% - 7% Moderate 60% / 40% VUL 7% - 8% Moderate-Aggressive 80% / 20% VUL 8% - 9% Aggressive 100% / 0% VUL 9% - 10% Gross vs. Net vs. Net-Net Rates of Return Question #8 What rate of return is reasonable to expect on the death benefit? 10

11 Question #9 Does the client understand liquidity restrictions and trade-offs? Front-End vs. Back-End Loaded Surrender Charges vs. Low/No Loads Low/No Loads vs. Commission Consessions Low-Cash-Value/Low(er)-Cost Trade-Off Life Settlements Question #10 What do financial strength and claims-paying ability ratings mean? Rank ALIRT AM Best Fitch Moody S&P Weiss 1 AAA A++ AAA Aaa AAA A+ 2 AA+ A+ AA+ Aa1 AA+ A 3 AA A AA Aa2 AA A- 4 AA- A- AA- Aa3 AA- B+ 5 A+ B++ A+ A1 A+ B 6 A B+ A A2 A B- 7 A- B A- A3 A- C+ 8 B- BBB+ Baa1 BBB+ C 9 C++ BBB Baa2 BBB C- 10 C+ BBB- Baa3 BBB- D+ Total Question #10 What do financial strength and claims-paying ability ratings mean? Use aggregate Ranking instead of individual Ratings Ratings changes as leading-indicator of cost increases Go beyond the Ratings for large transactions Ask about Internal Capacity Consider Diversification Ask about the use of Reinsurance 11

12 Take-Aways 10 Questions Shot Across The Bow What advisors can learn from lawsuit against Goldman Sachs Best Practice Standards for Life Insurance Stewardship Complementary Veralytic Report About Veralytic is an independent life insurance research company based in Tampa, Florida. Veralytic provides objective, innovative research solutions to help reduce costs and risk, improve consistency, and document due diligence processes against possible lawsuits and regulatory requirements. Our research reports are based upon a patented "five star" rating system that benchmark suitability against an ever growing database. Veralytic has been endorsed by the New York Bankers Association (NYBA), accepted by the Financial Planning Association (FPA), reviewed by the chief regulatory body of the financial services industry, and trusted by financial advisors, brokers, and fiduciaries across the United States. Contact Us Text VERALYTIC to to join our e-newsletter or find us on social media Barry Veralytic Barry D. Flagg, CFP, CLU, ChFC, GFS bflagg@veralytic.com

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