Conversions, Internal Replacement, and Policy Change Guidelines

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1 Conversions, Internal Replacement, and Policy Change Guidelines North American wants to ensure that the rules for servicing customer life insurance needs post-issue are clear and easily understood. We understand that a customer s needs may change and our processing guidelines are designed to place the client s needs first. The following guidelines are designed to aid with your understanding of and compliance with company procedures regarding requests for conversions, internal replacements, and other Policy Guarantee Change related Builder items. IUL CONVERSIONS Conversions are when a term life insurance product with contractual conversion privileges is converted to a whole life or universal life insurance product with the same death benefit. Replacement paperwork is not required Underwriting is not required Target Premium on the new policy will not be adjusted Note: Any additional policy change requested in conjunction with a Conversion will change the requested transaction from a Conversion (via the policy terms) to an Internal Replacement (Exchange) request. INTERNAL REPLACEMENT (EXCHANGE) GUIDELINES Should a client s death benefit needs and circumstances change, an Internal Replacement (Exchange) may be appropriate. Underwriting is required on all exchanges. Underwriting requirements are based on the insured s attained age and the total amount of life insurance applied for. Replacement paperwork is required and must include the benefit provided by the requested replacement. The Target Premium on the new policy may be adjusted based on how long the original policy has been in force (see Adjusted Target Premium section below). Surrender Charges If the dollar amount of the surrender charge on the new policy is the same or greater than on the original policy, the surrender charge on the original policy is waived. If the dollar amount of the surrender charge on the new policy is less than on the original policy, the net difference in the Surrender Charge between the original and new policy is taken from the rollover amount. Agent Involvement If an exchange is requested by an agent who was not the original agent on the policy, North American will process the request without notifying the original agent.

2 Compensation on Internal Replacements The compensation on an exchange will depend upon three items, which are described in additional detail below: Money eligible for compensation The Adjusted Target Premium The commission rates for the new policy Money Eligible for Compensation The first step in determining agent compensation is to determine how much money is eligible to receive compensation. New premium that is not coming from the internal replacement will be fully eligible for compensation (this includes any money coming from an external 1035 exchange). Money coming from the internal exchange is considered rollover money and will be split into two categories. The first category is for rollover money upon which we have already paid commissions. This amount will equal the premiums paid into the original policy, so it will be called Rollover Premiums. The amount eligible for compensation on Rollover Premiums is based on the duration of the original policy, as shown in the chart below. Percentage of Rollover Premiums Eligible for Compensation Policy Year of Original Policy Eligibility Factor 0% 20% 40% 60% 80% 100% Any net rollover amount (minus loans and surrender charges) above the Rollover Premiums would be considered Rollover Gain. Any Rollover Gain is fully eligible for compensation. Note: For polices that have ongoing premium payments, the policy year is based on the paid-to-date of the policy. If the policy does not have ongoing premium payments, the policy year is determined by the number of years that the policy has been in force. Adjusted Target Premium The second step in determining agent compensation is to determine the Adjusted Target Premium (ATP) for the new policy. Agents are paid the first-year commission rate on eligible money up to the ATP. Under the ATP formula shown below, a percentage of the original policy s Target Premium (or the new policy s Target Premium, if less than the original policy) may be eligible to receive the first-year commission rate, based on the policy year of the original policy. Additionally, ATP includes any increase in Target premium from the original policy to the new policy. ATP = Component 1 + Component 2 Component 1 = Target Premium of the original policy (or the new policy s Target Premium if less than the original) multiplied by the Target Premium Adjustment Factor that is based on the Policy Year of the original policy (see the following chart) Component 2 = Increase in Target Premium from the original policy to the new policy Target Premium Adjustment Factor Policy Year of Original Policy % of Original Target Premium used for First Year Commissions 0% 50% 60% 70% 80% 90% 100% For Term policies: Target Premium = annualized premium

3 Commission Rates Applied The last step is to apply the appropriate commission rates for the new policy to the amounts calculated above. For purposes of policy exchanges, the first-year commission rate will be paid on Eligible Money up to the ATP. Eligible Money greater than the ATP will be compensated at the excess commission rate. Ineligible Money will not receive any compensation. Please note: Commissions options that pay the same (or similar) amounts above and below target premium may not be selected on policy exchanges. These currently include Commission Options C and D, available on some products. Example An example that illustrates commission treatment on internal replacements is as follows. Original Policy Policy Year: 12 Account Value: $110,000 Total Premiums Paid: $70,000 Target Premium: $5,000 Surrender Charge: $20,000 Loaned Amount: $10,000 New Policy Target Premium: $12,000 New Premium Paid: $5,000 Surrender Charge: $10,000 Surrender Charge Analysis Surrender Charge decreases by $10,000 So rollover amount is reduced by $10,000 Money Eligible for Compensation Total Rollover Amount = $90,000 (Account Value minus Surrender Charge Applied and Loan Amount) Rollover Premiums = $70,000 Rollover Premiums Eligibility Factor = 40% Rollover Premiums Eligible for Comp. = $28,000 Rollover Gain = $20,000 (fully eligible) New Premiums = $5,000 (fully eligible) Total Money applied to New Policy = $95,000 Eligible Money = $53,000 Ineligible Money = $42,000

4 Adjusted Target Premium Component 1 = Original Target x Adjustment Factor Original Target = $5,000 Adjustment Factor = 100% Component 1 = $5,000 Component 2 = Increase in Target Premium New Target = $12,000 Original Target = $5,000 Increase in Target = $7,000 Adjusted Target Premium = Comp. 1 + Comp. 2 ATP = $5,000 + $7,000 ATP = $12,000 Commission Rates Applied Eligible Money = $53,000 First year rate (up to ATP) = $12,000 Excess commission rate = $41,000 Not eligible for commission = $42,000 Internal Replacements between Affiliated Companies Under state replacement regulations, a replacement between affiliated insurers is considered an internal replacement. Therefore, a replacement from Midland National to North American (or vice versa) is considered an internal replacement (exchange). The rules for replacements between Midland National and North American will differ from those described above: Surrender charges will not be waived on the original policy No Adjustment to Target Premium will be made

5 OTHER POLICY CHANGES Exercise of Guaranteed Insurance Riders, Options to Purchase Additional Insurance and Guaranteed Exchanges Exercise of Guaranteed Insurance Riders (GIR), Options to Purchase Additional Insurance (OPAI), and Guaranteed Exchanges are treated like Conversions. Replacement paperwork is not required Underwriting is not required Target Premium is not adjusted Note: OPAIs must convert to a currently marketed life product of the same type as the original policy (i.e. whole life to whole life) Other Policy Changes Changes to the existing policy transactions and the guidelines are shown in the following table. Life Insurance Policy Change Guidelines Type of Change Specific Action Underwriting Required? Target Adjusted? Points to Consider Death Benefit Amount Increase Yes Yes Decrease No No Increased monthly deductions and potentially increased surrender charges Potential to become Modified Endowment Contract (MEC); 1 Decrease Charge may be assessed Rider or Benefit Death Benefit Option Add Yes Yes Increased monthly deductions Remove No No Potential to become a MEC 1 Level to Increasing Yes Yes Increased monthly deductions and potentially increased surrender charges Increasing to Level No No Potential to become a MEC 1 Class or Rating Change Class or Rating Change Yes Yes Potential to become a MEC 1 1 For most policies, withdrawals are free from federal income tax to the extent of the investment in the contract, and policy loans are also tax-free so long as the policy does not terminate before the death of the insured. However, if the policy is a Modified Endowment Contract (MEC), a withdrawal or policy loan may be taxable upon receipt. Further, unpaid loan interest on a MEC may be taxable. A MEC is a contract received in exchange for a MEC or for which premiums paid during a seven-year testing period exceed prescribed premium limits (7-pay premiums). We re Here For Life 525 W Van Buren Chicago IL