The Cross Endorsement Buy-Sell Arrangement Many closely held businesses do not make formal plans to transition the business in the event of the premature death of a business owner, the lifetime transfer or sale of the business, or the retirement of one of the key business owners. Lack of planning can cause a business to fail because of the significant changes that are brought about by one or more of these these triggering events. By utilizing a cross endorsement buy-sell arrangement funded with a permanent life insurance policy, the funds required to transfer the business efficiently can be available. WHAT IS A CROSS ENDORSEMENT BUY-SELL ARRANGEMENT? This arrangement provides the business owner and his or her family the liquidity needed to transfer the business when one of the business owners dies prematurely. Alternatively, since the business owner owns the life insurance policy outright under this type of arrangement, the business owner can access the policy s potential cash value to supplement retirement income or to fund a lifetime buy-out of the business if and when the buy-sell plan is no longer needed. Moreover, this type of plan may also provide the estate liquidity needed in the future to account for the wealth created from a successful public offering of the company s stock. Because of its inherent flexibility, a permanent life insurance policy is an adaptable financial tool that can address a business owner s changing needs over time. HOW DOES IT WORK? Under a cross endorsement buy-sell arrangement, the business owner purchases and owns a life insurance policy on his or her life while the other business partners purchase and own policies on each of their respective lives. The value of each policy will be based on the projected value of the business and each business owner s proportional interest in the business. 1 The arrangement is structured as an endorsement split-dollar plan so that a portion or all of the death benefit can be endorsed for a rental charge to the other business owners 2 to satisfy the obligation under the buy-sell agreement. 3 Consequently, each business owner will recognize rental income on what they charge on their own policy. The business owner as owner of his or her own policy continues to have access to the policy s potential cash values. 4 To minimize the cash outlay needed to pay premiums, the company may make annual bonus payments to each business owner in the amount of the premium. The value of the rental charge is based on the economic benefit cost of the death benefit, which initially represents only a fraction of the premium. The economic benefit cost is measured annually using either a government or insurance company rate table that takes into account the owner s attained age as well as the amount of the death benefit being endorsed. Under the 2003 Final Split-Dollar Regulations (Final Regulations), the calculation of the annual economic benefit rates involves the use of the government Table 2001 rates, or the insurer s alternative term rates, whichever are lower. An insurer s alternative rates can be used only if the insurance company issuing the policy meets certain requirements outlined in the Final Regulations. 5 Finally, when the cross endorsement plan is terminated, the rental charge stops and each business owner retains his or her respective policy. Advanced Markets The Cross Endorsement Buy-Sell Arrangement John Hancock Life Insurance Company (U.S.A.) John Hancock Life Insurance Company of New York Page 1 of 5. Not valid without all pages.
ESTABLISHING ARRANGEMENTS BETWEEN IRREVOCABLE LIFE INSURANCE TRUSTS 6 Alternatively, the cross endorsement buy-sell arrangement can be structured so that an Irrevocable Life Insurance Trust (ILIT) established by each business owner is the owner of the policy, and the ILIT endorses the death benefit to each of the other owners or respective ILITs. 7 In this case, the insured business owner makes annual exclusion gifts to the trust equal to the premium. Annual exclusion gifts are the amount of annual gifts that can be made to any one person annually that are not subject to gift taxes. In 2011, the amount of annual gifts made to any one person that will not be subject to gift taxes is $13,000. 8 While the buy-sell plan is in place, the life insurance proceeds are to be paid to each surviving owner (or their respective ILIT) to fund the buy-sell obligation. However, if the plan is terminated, the business owner can continue to own the policy and use the policy cash values to supplement retirement income or to fund a buy-out of the business. The policy can also be retained by the business owner to cover estate tax liability. Although the life insurance proceeds are includable in the taxable estate when the policy is not owned by an ILIT, the estate receives a corresponding deduction for the liability associated with the buy-sell plan. Note that it is generally advisable for the insured not to have any incidents of ownership over a policy on the insured s life to avoid estate tax inclusion under IRC 2042. Where an entity is used in the planning process, the client should discuss with their legal and tax advisors how to structure the entity to avoid giving the insured incidents of ownership over the policy. 9 TRANSFER FOR VALUE Under Internal Revenue Code ( IRC ) section 101(a)(2), the transfer of a life insurance contract or any interest in the contract for valuable consideration can result in a portion of the death benefit being subject to income tax, unless an exception to the transfer-for-value rule applies. The statutory exceptions in IRC section 101(a)(2)(B) are often used to avoid this issue. Statutory exceptions to the transfer-for-value rule under IRC section 101(a)(2)(B) include (1) a transfer to the insured, or (2) a partner of the insured, or (3) a partnership in which the insured is a partner, or (4) to a corporation in which the insured is a shareholder or officer. Exceptions (2) and (3) require partnerships, and these two exceptions do not extend to S or C corporations. Although the IRS treated a limited liability company as a partnership for purposes of the transfer-for-value exceptions in PLRs 9625013 and 9625019, PLRs are only binding authority for the taxpayer to whom they are issued. Some commentators have questioned whether the IRS will challenge the business purpose of a newly formed partnership, particularly if it appears that its only purpose is to avoid the transfer-for-value rule. Client should consult their tax advisors. Page 2 of 5. Not valid without all pages.
BENEFITS Estate liquidity Cash is available from the life insurance proceeds for the efficient transfer of the business due to an owner s death, retirement, or sale of the business. Potential cash values Unlike a term insurance policy, the potential accumulation of the life insurance policy s cash values can be used to accommodate a lifetime buy-out or to supplement income when the buy-sell obligation is no longer required. No cost at termination Unlike other types of split-dollar plans, there is no cost to the business owner when the buy-sell plan is terminated. Flexibility of permanent insurance Permanent insurance provides the flexibility needed to transition the business based on an owner s changing needs over the life span. CONSIDERATIONS Potential transfer-for-value To avoid transfer-for-value issues with respect to the cross endorsements of the policy death benefits, clients should consult their tax advisors. Cash flow Cash flow to fund premiums is required. Increasing economic benefit cost The economic benefit costs increase with age. Taxable rental income It is likely that the rental income received by each business owner for the rental of the death benefit will be subject to ordinary income taxes under IRC 61 and/or under the 2003 Final Split-Dollar Regulations (Final Regulations). Final Split-Dollar Regulations A review of the Final Regulations that dictate how a split-dollar plan can be structured and describe the tax consequences of such a plan is recommended. Business Interest Premium Policy Company John Hancock Life Insurance Company Pay rental charge to each other Business Interest Premium Policy Endorse death benefit to each other Business Owner 1 Business Owner 2 Page 3 of 5. Not valid without all pages.
CASE STUDY: SPENCE WILLIAMS AND JACOB JAMESON Facts: Spence Williams (45) and Jacob Jameson (46), Preferred Non Smokers, each own 50% of BioTech Solutions, Inc. The value of the business has been appraised at $4,000,000, but the owners project their business to grow by 10% annually for the next 20 years. Spence and Jacob want their growing families to have the funds available to sell the business to each other should either one of them die prematurely. They also want flexibility to account for a buy-out before or at retirement, or to cover the estate taxes that may be due as a result of the personal wealth the business creates, especially if a public offering of the company stock is made in the future. Solution: Spence and Jacob have decided to enter into a buy-sell agreement in which each promises to buy out the other in the event of premature death. Each purchases John Hancock s Protection Universal Life Insurance policy for $2,000,000 and endorses or rents-out the death benefit on the policy to the other. Each will pay a rental charge based on their partner s age and the economic value of the death benefit being endorsed. Consequently, each of them will recognize rental income based on the rental fee received from the other, taxable at their ordinary income tax rate. Here s What It Looks Like: Jacob (50% Owner) Jacob endorses death benefit to Spence $2,000,000 Spence pays rental charge to Jacob (Year 1) $1,240 Jacob pays rental charge to Spence (Year 1) $1,180 Spence endorses death benefit to Jacob $2,000,000 Spence (50% Owner) The Numbers: Cumulative Rental Charges Paid CROSS ENDORSEMENT BUY-SELL PLAN COSTS YEAR 20 CROSS ENDORSEMENT COST LIFE INSURANCE COST NET BENEFIT Cumulative Rental Charges Collected Outlay Cumulative Premium Death Benefit Spence Williams $54,429 $50,100 $4,320 $368,740 $2,000,000 Jacob Jameson $50,100 $54,420 ($4,320) $385,360 $2,000,000 This is a supplemental illustration authorized for distribution only when preceded or accompanied by a basic illustration from the issuer. Benefits and values may not be guaranteed; the assumptions on which they are based are subject to change by the insurer. Actual results may be more or less favorable. Refer to the basic illustration for guaranteed elements and other important information. The rental charge is based on the insurance company s alternative term rate table. The premiums due on Spence s policy, $18,437, and on Jacob s policy, $19,268, are based on 20 premium payment years. When the buy-sell plan terminates, the endorsement will terminate and each owner will continue to own the policy. The potential cash value accumulation can partially fund a buy-out at retirement or the policy death benefit can remain intact to provide the family with estate liquidity at death. Clearly, a permanent insurance policy can go a long way in providing security for changing needs. Page 4 of 5. Not valid without all pages.
This material does not constitute tax, legal, accounting or other advice and neither John Hancock nor any of its agents, employees or registered representatives is in the business of offering such advice. It cannot be used by the taxpayer for the purpose of avoiding any IRS penalty. This material was written to support the marketing of the transactions or topics it addresses. Anyone interested in these transactions or topics should seek advice based upon his or her particular circumstances from an independent professional advisor. 1. A qualified appraisal of the business should be completed. 2. Each owner may desire to endorse one hundred percent (100%) of the death benefit to the other owners during the buy-sell period. The split-dollar final regulations are silent as to whether this is permissible. Clients should consult their tax advisors to discuss this issue. 3. Under the split-dollar final regulations, the economic benefit amounts received by each owner will be treated as rental income and taxed at ordinary income tax rates. In essence, the sum of all anticipated economic benefit amounts represents twice-taxed dollars. The present value of the combined income taxes on the sum of all anticipated economic benefits is essentially an option price the parties have agreed to at the outset to purchase the flexibility provided by the cross endorsement buy-sell arrangement. Clients should consult their tax advisors to discuss this issue. 4. The parties to the cross endorsement buy-sell arrangement may wish to restrict access to the policy s cash values to the extent that access does not impair the death benefit being endorsed. That is, loans and withdrawals will reduce the death benefit, cash surrender value, and may cause the policy to lapse. Lapse or surrender of a policy with a loan may cause the recognition of taxable income. Policies classified as modified endowment contracts may be subject to tax when a loan or withdrawal is made. A federal tax penalty of 10% may also apply if the loan or withdrawal is taken prior to age 59 1 2. Cash value available for loans and withdrawals may be more or less than originally invested. 5. See IRS Notice 2002-8 referenced in the 2003 Final Split-Dollar Regulations. Briefly, in order to use an insurer s alternative rates, the insurer must make such rates known to prospective purchasers of their term insurance product and the insurer must regularly sell its alternative term product. 6. Each owner s legal advisor should determine if applicable state trust law permits the owner s ILIT to endorse death benefits to the other owners (or ILITs created by the other owners) as part of the buy-sell arrangement to which the owner s ILIT is a party. Special provisions may have to be included in an owner s ILIT instrument to satisfy (or override) state trust law with respect to this issue. Clients should consult their tax advisors to discuss this issue. 7. Trusts should be drafted by an attorney familiar with such matters to take into account income and estate tax laws (including generationskipping transfer taxes). Failure to do so could result in adverse tax treatment of trust assets. 8. Annual exclusion gifts are indexed annually for inflation and subject to specific rules. See IRC 2503 (b). 9. See PLR 200747002, in which three business owners established an Insurance LLC (Limited Liability Company) to own life insurance policies on the lives of the business owners with management of the policies by an independent Manager. The IRS ruled that the business owners would not have any incidents of ownership in the life insurance policies. PLRs are binding authority only for the taxpayer to whom they are issued. Insurance policies and/or associated riders and features may not be available in all states. Insurance products are issued by John Hancock Life Insurance Company (U.S.A.), Boston, MA 02116 (not licensed in New York) and John Hancock Life Insurance Company of New York, Valhalla, NY 10595. 2011 John Hancock. All rights reserved. IM1407 03/11 MLINY01201114197 Not available in Mississippi and Nevada. Policy Form: 11PROUL INSURANCE PRODUCTS: Not FDIC Insured Not Bank Guaranteed May Lose Not a Deposit Not Insured by Any Government Agency Page 5 of 5. Not valid without all pages.
Valuable Information About Your Life Insurance Illustration Jacob Jameson Age: 46 Universal Life Insurance The Universal Life Insurance policy which you are considering provides flexible death benefit protection and premium payment flexibility. The values in the insurance contract grow based on the amount and timing of each premium payment, plus the interest rate and other credits applied to the policy, less insurance and other charges. Initial Planned Premium: $19,268.00 / Billing Mode: Annual Based on Current Charges and an Initial Current Rate of 5.20% received. Death benefit option changes, loans, withdrawals, rider termination or change, and/or face amount decreases will also affect the Death Benefit Protection feature. If a policy loan is outstanding, the Death Benefit Protection feature will not prevent your policy from lapsing if the Policy falls to zero. Certain aspects of the policy cannot be predicted with absolute certainty. These nonguaranteed elements are described on the following pages. For example, the interest rate credited may exceed the guaranteed rate and monthly charges may be less than the maximum guaranteed charges. This is an illustration only and is not intended to predict actual performance. Death Benefit Protection This policy illustration shows the Death Benefit Protection feature guaranteeing the policy death benefit to the Life Insured s attained age 77. As long as the Death Benefit Protection feature is in effect, your policy cannot lapse even if the Cash Surrender falls to zero or below. The Death Benefit Protection feature will stay in effect as long as the reference value called the Death Benefit Protection is greater than zero. The Death Benefit Protection is a reference value and is only used to determine whether or not the Death Benefit Protection feature will stay in effect. The policyowner cannot access the reference value. Like your Policy, the Death Benefit Protection is directly affected by the timing and amounts of premiums paid. To ensure that you have the Death Benefit Protection feature in effect for the period illustrated, it is important that premium payments are paid when they are due, otherwise your policy may lapse. For purposes of calculating your Death Benefit Protection, we will apply premiums retroactively to the beginning of the policy month in which they are If you pay only the illustrated Death Benefit Protection Premium, you may be foregoing the advantage of building significant value in this policy, and your Policy may be insufficient to keep this policy in force beyond the Death Benefit Protection period. In this event, premiums significantly higher than the Death Benefit Protection Premium may be required to keep your policy from lapsing. The financial consequences of having little or no Policy also include a potentially lower death benefit (under death benefit option 2), less available loan value, and less net surrender value available for partial withdrawals or a surrender of the policy. Death Benefit The life insurance provided in this illustration reflects a Total Initial Death Benefit of $2,000,000. The Death Benefit is composed of $2,000,000 in Base Face Amount (Option 1). The net death benefit reflects total loan plus any loan interest due. Planned Premium Outlay One of the advantages of Universal Life Insurance is premium payment flexibility, allowing you to vary the amount of your payments. This illustration assumes an Initial Planned Premium Outlay of $19,268.00 and that all subsequent premium payments are made at the beginning of each modal period. Reduced or discontinued premiums in future years are only possible if the premiums paid and amounts credited are sufficient to cover the cost of insurance and administrative expenses. These factors, as well as any outstanding policy loans or withdrawals, could necessitate additional premiums to maintain your insurance coverage. Payments in excess of the planned premium are subject to underwriting approval. Page 1 of 11 01/05/2011 01:41:40 PM
Valuable Information About Your Life Insurance Illustration (cont'd) Jacob Jameson Age: 46 Initial Planned Premium: $19,268.00 / Billing Mode: Annual Based on Current Charges and an Initial Current Rate of 5.20% Guaranteed Coverage Premium Based on the initial death benefit shown in the illustration, the level annual premium to guarantee coverage for life is $32,199.93. Death Benefit option changes, loans, withdrawals, policy changes, and face amount changes will cause this premium to be recalculated. Premiums are subject to maximum guidelines allowed by the Internal Revenue Code. Interest Rate Interest is illustrated at an initial assumed effective annual rate of 5.20%. We determine the rate of interest to be credited to the Policy based on our assessment of investment yields and other considerations as outlined in your policy. The current rate may increase or decrease, but at no point will the interest credited to the policy be lower than the guaranteed annual rate of 2.50%. Our obligations under your policy are backed by our general account assets. In addition to fixed income investments, such as corporate bonds, we expect to invest a portion of the premiums received under this class of policies in equities and other longer-duration assets. This investment approach, which may be different from the mix expected with other universal life policies, is intended to produce results that would permit us to credit values that maximize your policy s performance over the longer term. However, this approach could also cause the policy to experience a higher degree of variability of results year-to-year relative to other universal life policies. It is important to review your annual statement and request periodic in-force illustrations to make sure your policy continues to meet your objectives. Illustrations will be shown at the guaranteed minimum interest rate, and an assumed rate (or rates). An assumed illustrated rate will never be higher than the current rate, or lower than the guaranteed minimum rate. s illustrated at the current or an assumed rate are not guarantees or estimates, but merely illustrate results on the basis of the selected assumption. Changes in the rate of interest that we declare will affect both the interest and Persistency Credit applied to your Policy. The table below shows how these changes could affect the continuation of your coverage, keeping other assumptions constant (including planned premiums, issue age, risk class and current charges): Interest Rate Assumption 5.20% Initial Current Rate N/A 2.50% Minimum Rate 32 Policy Year at Lapse* * In this table, the lapse year is hypothetical only, based upon the assumed factors, and is not guaranteed. For instance, the mortality charges used in these calculations are less than the maximum charges, and the Persistency Credit assumed is greater than the guaranteed minimum. Accessing Policy After your policy has been in force for one year, you can make partial cash withdrawals. You can surrender your policy for cash at any time. We will pay you the policy value less a surrender charge and any policy debts you may have. You can also borrow the available cash value at any time. Amount Credited This is the interest earned on the Policy including the amount of interest credited on the Loan Account, plus the Persistency Credit. Policy Loans Policy loans may be taken against the Policy at any time, and if projected on an illustration, are assumed to be taken at the beginning of the year. The maximum loan amount available is the Surrender less any indebtedness, one year of policy charges, and one year's loan spread. The net cost of a loan equals the loan interest rate charged less the loan interest rate credited to the portion of Policy securing the loan. This differential is guaranteed to be no greater than 1.25% in policy years 1-10. In subsequent years, the differential is currently 0.00%, and guaranteed not to exceed Page 2 of 11 01/05/2011 01:41:40 PM
Valuable Information About Your Life Insurance Illustration (cont'd) Jacob Jameson Age: 46 0.25%. Initial Planned Premium: $19,268.00 / Billing Mode: Annual Based on Current Charges and an Initial Current Rate of 5.20% performed on the current scale only. Loan interest is payable in arrears. The loan interest rate used in this policy illustration is shown in the Policy Summary. Loan interest rates are variable and subject to change annually on the policy anniversary. Annual Loan Interest This is the interest charged on the outstanding Policy Debt. In the event that you do not pay the loan interest charged in any Policy Year, it will be borrowed against the policy and added to the Policy Debt in arrears at the Policy Anniversary. Withdrawals Withdrawals reduce the Policy and the Death Benefit. Withdrawals, if illustrated, are assumed taken at the beginning of the year. Policy Continuation at Age 121 Provided your coverage is in effect on the policy anniversary nearest the date on which the life insured reaches attained age 121, coverage will continue after age 121 and interest will be credited. No additional charges, other than those for any outstanding policy loans, will be deducted. The tax implications with respect to policies that continue beyond age 100 are not clear at the present time. We urge you to consult your tax advisor regarding this issue if there are questions about what happens after age 100. Taxation of Life Insurance The information contained in this illustration is based on certain tax and legal assumptions. We suggest that you seek professional counsel regarding the interpretation of current tax laws and accounting practices as they relate to your actual situation. The Technical and Miscellaneous Revenue Act (TAMRA) of 1988 classifies some policies as Modified Endowment Contracts (MECs). Distributions from these policies (excluding death benefits but including policy loans and withdrawals) are taxed differently and may be subject to an IRS 10% penalty tax. TAMRA testing has been The initial annual 7-pay premium for this policy is $96,500.00. Based on our interpretation of TAMRA, this policy as illustrated would not be considered a Modified Endowment Contract (MEC). Employer-owned Life Insurance. Where the owner of the policy is the employer of the insured, Section 101(j) of the Internal Revenue Code specifies a number of requirements in order for life insurance death benefits to be excluded from income taxation. Potential insureds must be limited to the employer s directors and "highly compensated" employees (as defined by the law). Also, before the issuance of the policy, the potential insured must (1) be notified in writing that the employer/policyowner intends to insure the employee's life and the maximum face amount for which the employee could be insured; (2) give his or her written consent to being a life insured under the policy, and agree that such coverage may continue after the life insured terminates employment; and (3) be informed in writing that the employer/policyowner will be a beneficiary of any proceeds payable upon the death of the employee. Finally, the policyowner is required to keep records and make an annual report concerning its employer-owned life insurance policies. Taxpayers should seek the counsel of qualified tax advisors to determine the applicability of IRC 101(j) or other provisions of federal tax law and/or compliance with the requirements of any such law or regulation. Other Considerations This is an illustration only. An illustration is not intended to predict actual performance. Unless otherwise stated, amounts credited and other values set forth in the illustration are not guaranteed. This illustration assumes that the currently illustrated nonguaranteed elements will continue unchanged for all years shown. This is not likely to occur, and the actual results may be more or less favorable. Future credits and deductions can vary at the company's discretion depending upon Page 3 of 11 01/05/2011 01:41:40 PM
Valuable Information About Your Life Insurance Illustration (cont'd) Jacob Jameson Age: 46 factors such as death claims, investment earnings and expenses, as well as policy owner actions such as the timing and amount of premium payments, policy lapse and reinstatement, loans and withdrawals, and contractual changes. Initial Planned Premium: $19,268.00 / Billing Mode: Annual Based on Current Charges and an Initial Current Rate of 5.20% To ensure that your policy continues to meet your objectives, we suggest that in addition to reviewing annual statements, you periodically request in force illustrations. In force illustrations will provide an updated projection of policy performance. Protection UL is issued by John Hancock Life Insurance Company (U.S.A.) of Boston, MA 02117. John Hancock Life Insurance Company (U.S.A.) consistently receives high financial strength ratings from independent rating agencies such as Fitch Ratings, A.M. Best, Standard & Poor's, and Moody's. For more information, please visit our website at www.johnhancock.com. For more than a century, John Hancock has offered security and high quality products to its customers. The company's experience and resources allow it to provide first class financial solutions to customers in every market in which it operates. Page 4 of 11 01/05/2011 01:41:40 PM
Basic Illustration Summary Jacob Jameson Age: 46 Coverage Summary Initial Initial Coverage Description Amount Premium Face Amount - Level for all years $2,000,000 $19,268.00 Policy Summary Initial Planned Premium: $19,268.00 / Billing Mode: Annual Based on Current Charges and an Initial Current Rate of 5.20% State Massachusetts Death Benefit Option 1 From 1 Thru 75 Definition of Life Insurance CVAT Payment Mode Annual Charges Current Assumed Interest Rate 5.20% From 1 Thru 75 Loan Interest Rate 5.00% From 1 Thru 75 Owner Tax Bracket 35.00% From 1 Thru 75 Initial 7-Pay Premium Target Premium $96,500.00 $15,056.33 Minimum Initial Premium $670.94 Death Benefit Protection Period Based on Illustrated Assumptions 31 Years Interest Adjusted Indexes on Insured at 5% -------Payment------- 10 Year 20 Year ----------Cost---------- 10 Year 20 Year Guaranteed Current Non-guaranteed Element 9.63 9.63 0.00 9.63 9.63 0.00 6.38 4.03 2.35 8.26 4.53 3.73 Interest Adjusted Indexes These indexes provide a means for evaluating the comparative cost of the policy under stated assumptions. They can be useful in comparing similar plans of insurance, a lower index being better than a higher one. These indexes reflect the time value of money. Indexes are approximate because they involve assumptions, including the rate of interest used. PUL11 Page 5 of 11 01/05/2011 01:41:40 PM
Numeric Summary Jacob Jameson Age: 46 GUARANTEED ASSUMPTIONS These policy benefits and values are GUARANTEED NON-GUARANTEED ASSUMPTIONS based on the guaranteed interest of SUMMARY YEARS ASSUMPTIONS Midpoint Scale Assumed Scale 2.50% and guaranteed charges. Based on your Planned Premium Outlay, the Years Premium Paid in Cash 20 20 20 policy would remain in force until policy year 32, month 8*. NON-GUARANTEED ASSUMPTIONS Summary Year 5 These policy benefits and values are Surrender 35,470 46,316 57,861 based on non-guaranteed elements that Death Benefit 2,000,000 2,000,000 2,000,000 are subject to change by the insurer. Actual results may be more or less Summary Year 10 favorable. Surrender 85,924 115,278 148,020 ASSUMED SCALE: Death Benefit 2,000,000 2,000,000 2,000,000 Policy benefits and values are based on the initial current interest rate of 5.20% Summary Year 20 and current charges. Based on your Surrender 95,272 212,509 353,837 Planned Premium Outlay, the policy Death Benefit 2,000,000 2,000,000 2,000,000 would remain in force until age 121*. Summary Age 70 MIDPOINT SCALE: Surrender 0 129,601 359,851 Assumes the midpoint interest rate Death Benefit 2,000,000 2,000,000 2,000,000 and charges which are halfway between current and guaranteed. Based on your Planned Premium Outlay, the policy would remain in force until policy year 32, month 8*. Premiums are assumed to be paid at the beginning of each modal period. Policy values, including surrender values and death benefits, are illustrated as of the end of the year, unless otherwise noted. I have received a copy of this illustration and understand that any non-guaranteed elements illustrated are * See Policy Continuation at Age 121 on "Valuable Information" page. Initial Planned Premium: $19,268.00 / Billing Mode: Annual subject to change and could be either higher or lower. The representative has told me they are not guaranteed. I further understand that the guarantees provided by the Death Benefit Protection feature are directly affected by the amount and timing of premiums paid. Representative's Address: d Agent.. <ins1si> <ins1dt> Applicant: Date: (Signature) (mm/dd/yyyy) I certify that this illustration has been presented to the applicant and that I have explained that any non-guaranteed elements illustrated are subject to change. I have made no statements that are inconsistent with the illustration. <asi> <adt> Representative: Date: (Signature) (mm/dd/yyyy) Page 6 of 11 01/05/2011 01:41:40 PM
Policy Year John Hancock Life Insurance Company (U.S.A.) Guaranteed and Nonguaranteed s Jacob Jameson Age: 46 EOY Age Planned Premium 1 47 19,268 10,309 0 2,000,000 15,108 0 2,000,000 2 48 19,268 20,819 764 2,000,000 29,614 9,559 2,000,000 3 49 19,268 31,342 12,401 2,000,000 44,272 25,332 2,000,000 4 50 19,268 41,841 24,015 2,000,000 59,215 41,389 2,000,000 5 51 19,268 52,183 35,470 2,000,000 74,573 57,861 2,000,000 6 52 19,268 62,286 46,688 2,000,000 90,416 74,818 2,000,000 7 53 19,268 71,954 57,470 2,000,000 106,801 92,317 2,000,000 8 54 19,268 81,126 67,756 2,000,000 123,712 110,343 2,000,000 9 55 19,268 89,577 77,322 2,000,000 141,217 128,961 2,000,000 10 56 19,268 97,065 85,924 2,000,000 159,162 148,020 2,000,000 Totals: 192,680 End of Year Guaranteed Assumptions 2.50% Minimum Rate, Maximum Charges Policy Surrender Death Benefit Initial Planned Premium: $19,268.00 / Billing Mode: Annual End of Year Non-Guaranteed Assumptions 5.20% Initial Current Rate, Current Charges Policy Surrender Death Benefit 11 57 19,268 103,878 93,850 2,000,000 177,952 167,925 2,000,000 12 58 19,268 109,596 100,683 2,000,000 197,064 188,151 2,000,000 13 59 19,268 114,380 106,581 2,000,000 216,407 208,608 2,000,000 14 60 19,268 118,028 111,343 2,000,000 236,019 229,334 2,000,000 15 61 19,268 120,236 114,665 2,000,000 255,609 250,039 2,000,000 16 62 19,268 120,604 116,147 2,000,000 274,909 270,452 2,000,000 17 63 19,268 118,635 115,293 2,000,000 294,403 291,060 2,000,000 18 64 19,268 113,941 111,713 2,000,000 314,081 311,852 2,000,000 19 65 19,268 106,258 105,144 2,000,000 333,909 332,795 2,000,000 20 66 19,268 95,272 95,272 2,000,000 353,837 353,837 2,000,000 Totals: 385,360 21 67 0 64,397 64,397 2,000,000 357,160 357,160 2,000,000 22 68 0 28,936 28,936 2,000,000 359,380 359,380 2,000,000 23 69 0 0 0 2,000,000 360,336 360,336 2,000,000 24 70 0 0 0 2,000,000 359,851 359,851 2,000,000 25 71 0 0 0 2,000,000 357,624 357,624 2,000,000 26 72 0 0 0 2,000,000 353,562 353,562 2,000,000 27 73 0 0 0 2,000,000 346,646 346,646 2,000,000 28 74 0 0 0 2,000,000 336,396 336,396 2,000,000 29 75 0 0 0 2,000,000 344,530 344,530 2,000,000 30 76 0 0 0 2,000,000 356,638 356,638 2,000,000 Totals: 385,360 ## Indicates that the policy has lapsed under the illustrated assumption. Additional premium would be required to maintain policy benefits. Page 7 of 11 01/05/2011 01:41:40 PM
Policy Year John Hancock Life Insurance Company (U.S.A.) Guaranteed and Nonguaranteed s (cont'd) Jacob Jameson Age: 46 EOY Age Planned Premium 31 77 0 0 0 2,000,000 368,758 368,758 2,000,000 32 78 0 ## ## ## 380,830 380,830 2,000,000 33 79 0 392,801 392,801 2,000,000 34 80 0 404,615 404,615 2,000,000 35 81 0 416,220 416,220 2,000,000 36 82 0 427,566 427,566 2,000,000 37 83 0 438,621 438,621 2,000,000 38 84 0 449,343 449,343 2,000,000 39 85 0 459,624 459,624 2,000,000 40 86 0 469,341 469,341 2,000,000 Totals: 385,360 End of Year Guaranteed Assumptions 2.50% Minimum Rate, Maximum Charges Policy Surrender Death Benefit Initial Planned Premium: $19,268.00 / Billing Mode: Annual End of Year Non-Guaranteed Assumptions 5.20% Initial Current Rate, Current Charges Policy Surrender Death Benefit 41 87 0 478,362 478,362 2,000,000 42 88 0 486,533 486,533 2,000,000 43 89 0 493,674 493,674 2,000,000 44 90 0 499,602 499,602 2,000,000 45 91 0 503,356 503,356 2,000,000 46 92 0 505,247 505,247 2,000,000 47 93 0 504,880 504,880 2,000,000 48 94 0 501,729 501,729 2,000,000 49 95 0 495,082 495,082 2,000,000 50 96 0 483,970 483,970 2,000,000 Totals: 385,360 51 97 0 468,057 468,057 2,000,000 52 98 0 445,540 445,540 2,000,000 53 99 0 413,670 413,670 2,000,000 54 100 0 368,672 368,672 2,000,000 55 101 0 374,193 374,193 2,000,000 56 102 0 379,690 379,690 2,000,000 57 103 0 385,186 385,186 2,000,000 58 104 0 390,719 390,719 2,000,000 59 105 0 396,564 396,564 2,000,000 60 106 0 402,860 402,860 2,000,000 Totals: 385,360 ## Indicates that the policy has lapsed under the illustrated assumption. Additional premium would be required to maintain policy benefits. Page 8 of 11 01/05/2011 01:41:40 PM
Policy Year John Hancock Life Insurance Company (U.S.A.) Guaranteed and Nonguaranteed s (cont'd) Jacob Jameson Age: 46 EOY Age Planned Premium 61 107 0 409,741 409,741 2,000,000 62 108 0 417,427 417,427 2,000,000 63 109 0 426,335 426,335 2,000,000 64 110 0 437,133 437,133 2,000,000 65 111 0 448,788 448,788 2,000,000 66 112 0 462,737 462,737 2,000,000 67 113 0 481,616 481,616 2,000,000 68 114 0 511,297 511,297 2,000,000 69 115 0 565,911 565,911 2,000,000 70 116 0 683,641 683,641 2,000,000 Totals: 385,360 End of Year Guaranteed Assumptions 2.50% Minimum Rate, Maximum Charges Policy Surrender Death Benefit Initial Planned Premium: $19,268.00 / Billing Mode: Annual End of Year Non-Guaranteed Assumptions 5.20% Initial Current Rate, Current Charges Policy Surrender Death Benefit 71 117 0 904,473 904,473 2,000,000 72 118 0 967,658 967,658 2,000,000 73 119 0 1,037,206 1,037,206 2,000,000 74 120 0 1,111,965 1,111,965 2,000,000 75 121 0 1,191,161 1,191,161 2,000,000 76 122 0 1,253,101 1,253,101 2,000,000 77 123 0 1,318,263 1,318,263 2,000,000 78 124 0 1,386,812 1,386,812 2,000,000 79 125 0 1,458,927 1,458,927 2,000,000 Totals: 385,360 ## Indicates that the policy has lapsed under the illustrated assumption. Additional premium would be required to maintain policy benefits. Page 9 of 11 01/05/2011 01:41:40 PM
Glossary of Terms Jacob Jameson Age: 46 Face Amount The Face Amount is the coverage provided by the base policy. Any decreases to the Face Amount after the first policy year must fall within policy minimums. Monthly Administrative Charge A monthly Administrative Charge of $15.00 will be assessed in all years, current and guaranteed. Contract Charge Contract Charge is an additional $0.0886 per $1,000 of Face Amount per policy month. It will be deducted for the first 20 policy years. This charge varies by the insured's issue age, gender, risk classification, and the policy duration. Cost Of Insurance Current insurance charges are based on Company experience. The current rates may change, but are guaranteed never to exceed the maximum rates. Maximum rates reflect the 2001 CSO Sex and Smoker Distinct Age Nearest Birthday Ultimate Mortality Table. Persistency Credit Beginning in Policy Year 11, a Persistency Credit is added to your Policy on each monthly processing date. The Persistency Credit is guaranteed to be no less than 0.025% of the Policy. The amount of Persistency Credit that we declare above the guaranteed minimum will be determined in a uniform and non-discriminatory manner. We will determine the Persistency Credit taking into account our investment experience and other company factors, and policy owner actions such as the actual timing and amount of premium payments, policy lapse and reinstatement, loans and withdrawals, and contractual changes. The Persistency Credit in this illustration assumes that all nonguaranteed elements of this policy will continue unchanged, and that the policy owner s actions will not vary from those illustrated. You can see a projection of the effect that a policy owner action might have on the Persistency Credit by requesting an in-force illustration. Initial Planned Premium: $19,268.00 / Billing Mode: Annual Based on Current Charges and an Initial Current Rate of 5.20% Death Benefit Option Death Benefit Option 1 provides a level amount of coverage. It will increase only when necessary to maintain the definition of life insurance. Death Benefit Option 2 provides coverage equal to the Face Amount plus the Policy plus any amount necessary to maintain the definition of life insurance. Death Benefit The Death Benefit illustrated is the Face Amount plus any Required Additional Death Benefit. This is the value that is payable upon the death of the insured as stated on the front page of the policy. The actual amount payable may be decreased by loans or increased by additional insurance benefits. Death Benefits are illustrated as of the end of the year. Death Benefit reflects the total loan plus any loan interest due. Income Income reflects any illustrated withdrawal, policy loan and/or loan interest due. Surrender The Surrender is the Policy less surrender charge(s), and is illustrated as of end of the year. This amount is shown net of withdrawals and total loans plus interest due. During the surrender charge period, there is a surrender charge assessed if all or part of the Face Amount is reduced. If the policy terminates for any reason, the amount of any outstanding loan (that was not previously considered income) could result in a considerable tax. Under certain situations involving large amounts of outstanding loans, you might find yourself having to choose between high premium requirements to keep your policy from lapsing and a significant tax burden if you allow the lapse to occur. Please consult your tax advisor for further information. Planned Premium Outlay The Planned Premium Outlay is the amount which the policyholder plans to pay. This illustration assumes that Page 10 of 11 01/05/2011 01:41:40 PM
Glossary of Terms (cont'd) Jacob Jameson Age: 46 planned premiums are paid at the beginning of each modal period indicated. Additional premiums may be paid while the policy is in force, subject to our minimum and maximum limits. Initial Planned Premium: $19,268.00 / Billing Mode: Annual Based on Current Charges and an Initial Current Rate of 5.20% Policy When premiums are paid, the balance, after premium charges are deducted, goes into the Policy. The Policy is credited daily with a guaranteed interest rate of 2.50% or the current rate, whichever is greater. Also, once each month, administrative and insurance charges are deducted. Required Additional Death Benefit The death benefit will automatically be increased if necessary to maintain the minimum amount of insurance needed to comply with current federal tax law (Section 7702 of the Internal Revenue Code). This will ensure that your policy maintains the favorable tax treatment associated with being a life insurance policy. Risk Class Classifications represent groups of people with similar risk characteristics and help to determine the cost of insurance. Final risk classification for a proposed insured is determined upon completion of the underwriting process, and may vary from what is shown on this illustration. If so, you will receive a Revised Basic Illustration prior to or upon delivery of your insurance contract. Page 11 of 11 01/05/2011 01:41:40 PM
Input Summary ~~ Internal Use Only ~~ Internal Use Only ~~ Jacob Jameson Age: 46 Product & Concept Concept Ledger Approved in Massachusetts Product Type Universal Life -- Single Life Product Protection UL 11 Policy Design Insured Name Jacob Jameson Sex Male Issue Age / Birthdate 46 State Massachusetts Risk Class Preferred NonSmoker Total Face Amount 2000000 Death Benefit Option Option 1 Definition of Life CVAT Insurance Test Premium Schedule -- Solve 1 20 Premium Duration 20 Premium Mode Annual Target Cash 1.00 Target Year Lifetime Crediting Rate Current Agent Name d Agent Policy Options Estimated Policy Issue Today + 1 Month Date Charges Current Lump Sum Month Year 1 1 Lump Sum Month 1 Years 2+ MEC Testing Allow MEC Target Cash 1.00 Target Year Lifetime Withdrawal Cap Basis Loan Cap None Loan Interest Payment Borrow Type Variable Loan Interest 5.00% Initial Planned Premium: $19,268.00 / Billing Mode: Annual Owner Tax Rate 35.00% Optional Reports Optional Presentations No Presentation Optional Reports Yes Input Summary Yes Rate John Hancock used the fully allocated expense method to test and verify all products for compliance with the NAIC Life Insurance Illustration Model Regulation. 01/05/2011 01:41:40 PM
Valuable Information About Your Life Insurance Illustration Spence Williams Age: 45 Universal Life Insurance The Universal Life Insurance policy which you are considering provides flexible death benefit protection and premium payment flexibility. The values in the insurance contract grow based on the amount and timing of each premium payment, plus the interest rate and other credits applied to the policy, less insurance and other charges. Initial Planned Premium: $18,437.00 / Billing Mode: Annual Based on Current Charges and an Initial Current Rate of 5.20% received. Death benefit option changes, loans, withdrawals, rider termination or change, and/or face amount decreases will also affect the Death Benefit Protection feature. If a policy loan is outstanding, the Death Benefit Protection feature will not prevent your policy from lapsing if the Policy falls to zero. Certain aspects of the policy cannot be predicted with absolute certainty. These nonguaranteed elements are described on the following pages. For example, the interest rate credited may exceed the guaranteed rate and monthly charges may be less than the maximum guaranteed charges. This is an illustration only and is not intended to predict actual performance. Death Benefit Protection This policy illustration shows the Death Benefit Protection feature guaranteeing the policy death benefit to the Life Insured s attained age 76. As long as the Death Benefit Protection feature is in effect, your policy cannot lapse even if the Cash Surrender falls to zero or below. The Death Benefit Protection feature will stay in effect as long as the reference value called the Death Benefit Protection is greater than zero. The Death Benefit Protection is a reference value and is only used to determine whether or not the Death Benefit Protection feature will stay in effect. The policyowner cannot access the reference value. Like your Policy, the Death Benefit Protection is directly affected by the timing and amounts of premiums paid. To ensure that you have the Death Benefit Protection feature in effect for the period illustrated, it is important that premium payments are paid when they are due, otherwise your policy may lapse. For purposes of calculating your Death Benefit Protection, we will apply premiums retroactively to the beginning of the policy month in which they are If you pay only the illustrated Death Benefit Protection Premium, you may be foregoing the advantage of building significant value in this policy, and your Policy may be insufficient to keep this policy in force beyond the Death Benefit Protection period. In this event, premiums significantly higher than the Death Benefit Protection Premium may be required to keep your policy from lapsing. The financial consequences of having little or no Policy also include a potentially lower death benefit (under death benefit option 2), less available loan value, and less net surrender value available for partial withdrawals or a surrender of the policy. Death Benefit The life insurance provided in this illustration reflects a Total Initial Death Benefit of $2,000,000. The Death Benefit is composed of $2,000,000 in Base Face Amount (Option 1). The net death benefit reflects total loan plus any loan interest due. Planned Premium Outlay One of the advantages of Universal Life Insurance is premium payment flexibility, allowing you to vary the amount of your payments. This illustration assumes an Initial Planned Premium Outlay of $18,437.00 and that all subsequent premium payments are made at the beginning of each modal period. Reduced or discontinued premiums in future years are only possible if the premiums paid and amounts credited are sufficient to cover the cost of insurance and administrative expenses. These factors, as well as any outstanding policy loans or withdrawals, could necessitate additional premiums to maintain your insurance coverage. Payments in excess of the planned premium are subject to underwriting approval. Page 1 of 11 01/05/2011 01:17:48 PM
Valuable Information About Your Life Insurance Illustration (cont'd) Spence Williams Age: 45 Initial Planned Premium: $18,437.00 / Billing Mode: Annual Based on Current Charges and an Initial Current Rate of 5.20% Guaranteed Coverage Premium Based on the initial death benefit shown in the illustration, the level annual premium to guarantee coverage for life is $33,412.54. Death Benefit option changes, loans, withdrawals, policy changes, and face amount changes will cause this premium to be recalculated. Premiums are subject to maximum guidelines allowed by the Internal Revenue Code. Interest Rate Interest is illustrated at an initial assumed effective annual rate of 5.20%. We determine the rate of interest to be credited to the Policy based on our assessment of investment yields and other considerations as outlined in your policy. The current rate may increase or decrease, but at no point will the interest credited to the policy be lower than the guaranteed annual rate of 2.50%. Our obligations under your policy are backed by our general account assets. In addition to fixed income investments, such as corporate bonds, we expect to invest a portion of the premiums received under this class of policies in equities and other longer-duration assets. This investment approach, which may be different from the mix expected with other universal life policies, is intended to produce results that would permit us to credit values that maximize your policy s performance over the longer term. However, this approach could also cause the policy to experience a higher degree of variability of results year-to-year relative to other universal life policies. It is important to review your annual statement and request periodic in-force illustrations to make sure your policy continues to meet your objectives. Illustrations will be shown at the guaranteed minimum interest rate, and an assumed rate (or rates). An assumed illustrated rate will never be higher than the current rate, or lower than the guaranteed minimum rate. s illustrated at the current or an assumed rate are not guarantees or estimates, but merely illustrate results on the basis of the selected assumption. Changes in the rate of interest that we declare will affect both the interest and Persistency Credit applied to your Policy. The table below shows how these changes could affect the continuation of your coverage, keeping other assumptions constant (including planned premiums, issue age, risk class and current charges): Interest Rate Assumption 5.20% Initial Current Rate N/A 2.50% Minimum Rate 32 Policy Year at Lapse* * In this table, the lapse year is hypothetical only, based upon the assumed factors, and is not guaranteed. For instance, the mortality charges used in these calculations are less than the maximum charges, and the Persistency Credit assumed is greater than the guaranteed minimum. Accessing Policy After your policy has been in force for one year, you can make partial cash withdrawals. You can surrender your policy for cash at any time. We will pay you the policy value less a surrender charge and any policy debts you may have. You can also borrow the available cash value at any time. Amount Credited This is the interest earned on the Policy including the amount of interest credited on the Loan Account, plus the Persistency Credit. Policy Loans Policy loans may be taken against the Policy at any time, and if projected on an illustration, are assumed to be taken at the beginning of the year. The maximum loan amount available is the Surrender less any indebtedness, one year of policy charges, and one year's loan spread. The net cost of a loan equals the loan interest rate charged less the loan interest rate credited to the portion of Policy securing the loan. This differential is guaranteed to be no greater than 1.25% in policy years 1-10. In subsequent years, the differential is currently 0.00%, and guaranteed not to exceed Page 2 of 11 01/05/2011 01:17:48 PM