Financial Underwriting 101

1. Financial Underwriting 101 John Hurley, CFP �, CLU, ChFC Director of Advanced Sales Dave Costanza Vice President of Underwriting Innovative Solutions Insurance Services, LLC

2. Financial Underwriting 101 Overview Protection vs. other aspects of life insurance Importance of insurable interest Income Replacement Estate Planning Estate Tax Planning Estate Liquidity Estate Equalization

3. Financial Underwriting 101 Overview Business Markets Key Person EE benefits Buy Sell

4. Financial Underwriting 101 Ancillary advantages of life insurance: Wealth Creation Tax Advantages High Rate of Return Salespeople often discuss these, but from the point of view of the underwriter, there must be a need for the death benefit protection.

5. Financial Underwriting 101 Need for Insurable Interest Insurers have set limits on available insurance for several reasons: Protect tax advantages of life insurance Ability to pay premiums Discourage wet-ink settlements Moral hazard: insurance should not put beneficiary in a better position than if the loss had not occurred

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7. Financial Underwriting 101 Income Protection: Protect income earned from work.

8. Financial Underwriting 101 Income Protection Most carriers simply apply an age-based multiple of salary. Transamerica�s table: Up to age 35: 30 36-45: 25 46-50: 20 51-55: 15 56-65: 10 66�70: 5 71+: individual consideration

9. Financial Underwriting 101 Income Protection Example: 45 year old earns $100,000 annually Multiple from table: 25 Guideline limits income coverage to $2.5M These are guidelines. Greater amounts are sometimes issued but require justification.

10. Financial Underwriting 101 Estate Planning Estate and IRD tax and settlement costs Carriers establish guidelines based on current estate value, growth rate, and life expectancy Prudential: 6% rate of growth, 8-10 years. More for younger clients, less for older. Not more than 2x current value. Example: $10 M estate today. Value in 8 years @ 6% = 16M. Reasonable guess of estate tax liability = 5M. IRD on transfer to nonspousal IRA / qualified plan benes Debt repayment

11. Financial Underwriting 101 Estate Equalization with privately held business One child will take over business

12. Financial Underwriting 101 Estate Equalization with privately held business Other children have other interests

13. Financial Underwriting 101 Estate Equalization with privately held business Just buying life insurance for benefit of the non-business children would be �wealth creation� There is insurable interest with a one-way buy-sell for child who will take over business. S/he buys business from the estate, which then has cash for other children. Estate and gift tax issues

14. Financial Underwriting 101 Business Markets: Key Person Protects the business against risk of loss due to untimely death Business is owner and beneficiary, but there is often a collateral assignment to a lender Carrier guidelines assume the value to the business can be measured by salary. Usual guideline is 5-10 times salary Sometimes there are separate guidelines for debt-repayment cases. Pru states that they will limit to 70% of the loan amount. Must show evidence of salary and explain the key role of the individual in the company

15. Financial Underwriting 101 Business Markets: Buy-Sell Meet liability created by buy-sell agreement Carriers do not publish guidelines, but the amount can usually be based on some growth Assumption that small business can be valued as a multiple of profits or of cash flow

16. Financial Underwriting 101 Importance of cover letters Every business app Every app with unusual circumstances Every app outside carrier guidelines ISIS� advanced sales staff can help: Jim Thornburgh JD, VP of Sales John Hurley CFP, CLU, ChFC, Dir. of Advanced Sales

17. Financial Underwriting 101 Cover Letters: Estate Planning Assets, liabilities, net worth Description of closely held business Distribution plans Trust arrangements Premium Payer Anything else that affects planning: blended family, distribution of other assets, etc.

18. Financial Underwriting 101 Cover Letters: Business For key person: info on individual�s employment unique qualifications, experience, record, longevity in the job Coverage in force or applied for on other key people For buy-sell: value of business and extent of ownership Assumption that business can be valued as a multiple of income or of cash flow Income statement Balance sheet helps, not as important as income statement Copy of buy-sell agreement Coverage in force or applied for on other owners

19. ISIS contact info Thrivent Representatives: call 888-314-4747 Maria Sanchez, Director of National Accounts Erick Pravia, Brokerage Director Fernando Morales, Associate Brokerage Director Independents: call 800-551-8289 Larry Ingber, Brokerage Director Ana Hart, Brokerage Director Advanced Markets: John Hurley, CFP, Director of Advanced Sales Jim Thornburgh, JD, LLM, VP of Sales