Universal Life

1. Universal Life

2. Will a UL Plan Sustain the Benefits & Expectations for You and Your Client? • Is this the right plan for your client? • Is your client willing to pay for the flexibility and opportunity/risk offered by a UL policy? • KYC - Important in UL • Does a UL match your client’s tolerance for risk and needs?

3. Like a tree, a UL plan may grow and bear fruit when understanding these issues... 1. The Company Background 2. Sound Long-Term Business Philosophy 3. Illustrations & Bonuses 4. Premium Allocation 5. Fees, Charges, and Guarantees 6. Cost of Insurance 7. Investment Accounts 8. MEs 9. 250% Rule 10. Standard Life

4. The Goal How to answer the BIG question for most advisors and their clients??? Which is the best company and UL product to choose for each individual client or situation?

5. Strong company roots It may help to determine how strong the roots of a company are by answering the following questions: • How long has the company been in business? • Which rating companies are used, why & what do they mean? • Who backs the Canadian assets? • Is there local support?

6. Strong company roots • A strong rating • For both advisors and clients this can mean….. • peace of mind • security • providing a solid foundation for products and services

7. Strong company roots • How long has the company been in business? • How long has the company been active in Canada? • Will changes in ownership = changes in business philosophy? • What is the difference between a “branch” operation Vs. a wholly owned subsidiary?

8. Strong company roots • Is there local support? • Effective help when you need it. • Training & education seminars • Individual support • product, sales & software • Advanced case consultants • Specialized quotes & contracts

9. Strong business philosophy • A strong business philosophy may be represented by….. • recognition as an industry leader • offering products that provide guarantees • adhering to provisions of the Income Tax Act • Providing a Total Customer Satisfaction Guarantee

10. Illustration Vs. Contract • The client is buying a contract NOT an illustration….. Askyourself • Are the COI costs contractually guaranteed? • Are the assumptions realistic? • Are the management expenses fair? • Is the bonus achievable…. • 100% of the time? • Less than 100% of the time • Illustrations should NOT be used to compare contracts!

11. The Illustration • It is being said that… • Illustrations are illusions • What is important to the Advisor? • What interest rate is associated with the investment • What are the management expenses • Is there a minimum guarantee • How is the bonus calculated

12. Illustrations are Illusions • “This is an illustration only and is not a guarantee of future performance. Actual results will likely differ from those illustrated. • 7% each year Vs. an average rate of 7% • premium patterns may change • clients risk tolerance may change • then there’s the bonus...

13. Illustrations are Illusions “A one per cent change in interest on the policy’s long-term investment can cause 5% to 10% change in quick pay premiums, and a 20% to 50% change in long-term values” Greg Cerar The Insurance Journal June /July 2000

14. Disclaimer • Compliance Ledger • Purpose...make client “aware” • Now exists for all life products • A positive not a negative • Bottom line… • If the client does not understand what is being bought s/he should not sign the compliance ledger and should not purchase this type of insurance

15. Rates of return • BE CONSERVATIVE…..it is much better to deliver good news than bad • When is an illustrated 6 - 7% not an actual 6 - 7%? • Variable rates Vs. Illustrated rates • Remember, the client is buying a contract -- not an illustration • It’s what’s actually credited to the plan that counts, not what is shown in a marketing or compliance ledger

16. 7% OR 7%? Which is better?

17. Investment accounts • Are they guaranteed to be available in the future? • probably not • what guarantees are their for future investments? • Is there a minimum death benefit guarantee? • Do the returns reflect “total” or just “price”? • Can you purchase an investment that has a guaranteed minimum return?

18. Rates of return • Timing is everything • Calendar year Vs. Policy year • Timing of transfer of deposits • Impact of monthly charges • Dollar cost averaging

19. Bonus calculations • Client controlled OR market controlled? • Realistic & Attainable? • How large an impact on illustrated values? • When credited? • Is it “capped”? • Can it be negative?

20. Bonuses - What are they? • Partial return of charges • Management Expenses • “Excess” mortality charges • partial return of policy reserve

21. “Market” bonus companies • Some companies • National • Maritime • Transamerica

22. Control of bonus • Market controlled • Based on “fund” performance • Positive return • get bonus • bonus normally capped • Negative return • No bonus • negative bonus • Formula usually complex

23. “Client” controlled bonus • Some companies • Standard Life • ManuLife • Sun Life

24. Control of bonus • Client controlled • Bonus based on… • Deposits and/or • Fund Value • Bonus credited • Based on Fund value • Regardless of annual rate of return

25. Example“Market” bonus • S&P 500 29 year historical return 1970 - 1999 • 22 years return exceeded 5.5% • 1 year <5.5% but >4% • 6 years < 4% • Effect on Bonus illustrated • Illustrated 100% of the time • Credited 75.86% of the time

26. Competitor A “market” bonus calculations Bonus is based on A = B x C, where A = bonus amount B = total fund value & C = % of D D is average earned interest rate D = (2 x E) / [(F + G) - E] E = Interest earned in dollars F = Fund Value (@ beginning year) G = Fund Value (@ year end) COMPLICATED? Large Bonus Amounts are Illustrated! Bonus can add up to 3.2% to the interest rate

27. Competitor B “market” bonus calculations • Performance Bonus • percentage of unborrowed account value • payable starting in year 5 • bonus is 200 bps if invested in Market Index Accounts or Daily Interest Accounts • bonus drops to 100 bps if any investment in Guaranteed Interest Accounts • ACIR* must be 5% or more * Average Credited Interest Rate

28. Bonus values $11,589 $14,487

29. Premium deposit account • Is there a separate account for costs or the ability to control the payment of expenses and insurance costs? • Is there a priority withdrawal sequence of funds from the various accounts to cover the charges? • The ideal is to have more control over the known costs of the policy and performance of the investment account

30. Fees and charges • Clearly shown? • Guaranteed? • What is not readily shown? • PPTaxes & IITaxes • MVA - are MVA charges levied on expenses and deductions? • COI in addition to the change of investment account / term?

31. Fees and charges • Administration fees • are they capped? • are they guaranteed? • Provincial Tax - can change • IIT - 50-80 bps

32. Cost of Insurance • Competitive? • Can you switch from YRT to Level? • Guaranteed? • Can the optimum date of crossover be calculated in the software? • Will the company automatically advise the client/advisor e.g. 15 yrs down the road of the crossover? • Are mortality charges affected by bonus? • Are there COI charges after age 85? • Lapse supported charges, is this an issue?

33. The 250% Rule Beware of selling a Universal Life based on Minimum Premium. CCRA has an anti-dump-in rule that can minimize your fund value after Year 7.

34. Management Expenses (MEs) • Management Expenses (similar to and better known in the fund industry as MERs) • Be careful of the ‘double whammy’. That is, if investment accounts are tied to mutual funds which already have MER charges.

35. MEs • What constitutes a management expense charge? • bonus (50-100 bps) • IIT (50-85 bps) • profit??? • commissions (25 ??? bps) • how many days of the year is the ME charged? • is the ME guaranteed not to change?

36. Management Expense components • What we keep to pay... • bonus 70-120 bps • IIT 55 bps • commission 25 bps • Investment Expense • capital tax • profit TOTAL: 150-200 bps (+ Profit + Capital Tax + Management Fees)

37. Premium taxes • Our illustrations and minimum premium calculations are generated using the current provincial premium tax. • These taxes are deducted from the deposits invested in the exempt funds • A higher tax may be incurred if... • provincial premium taxes increase • insured moves to another province • a new type of tax is implemented on premiums

38. Currency exchange • Is a foreign fund using CDN$ for credit to the policy of the foreign fund? • Why can credited rates of return of the S&P 500 for example, vary from company to company?

39. How to decide • Which company’s UL product is Best for Your Client? • If you can offer, for example, 10 insurance company UL products to a client, you’d have to be a full-time expert to know them all really well on an ongoing basis Try this approach: • Know one company’s product best. Then, compare other companies with your most familiar product. • Try a checklist, assigning value points for each benefit or feature that is relevant to your client’s needs

40. Will your UL choice sustain benefits for your clients and their heirs?

41. Compare some of the competition & The Standard Life Advantage You may find some of the following slides interesting… Also, we have on-going competitive analysis available -- for internal use only. Please advise if & when you need additional information.

42. The Standard Life Advantage OUTSTANDING FEATURES AND BENEFITS: • Seal of Integrity -- 6-month Total Customer Satisfaction Guarantee -- in addition to the regular 10-day right to return a policy upon delivery • Tele-underwriting (you have the option to leave the health underwriting to our team) • Generic Applications accepted • Temporary Insurance Agreement for up to $1 million without a binding deposit on the • SLAC application only • + App. & Pol # the same on SLAC app.

43. The Standard Life Advantage PERSPECTA UNIVERSAL LIFE • 75% guarantee of net deposits in ILFs • except Science & Technology on death • fund value paid-out and/or paid-up insurance options on 1st death on JLTD contract • Superior bonus structure in a Universal Life Policy - it’s client controlled: based on deposits made & % of fund • Hybrid death benefit option on UL product guaranteeing return of net deposits or fund (whichever is greater) upon death. • Low min. premium, high levels of tax sheltering; multiple lives, competitive MEs • Competitive disability payout provisions

44. Perhaps some basic guidelines • Universal Life insurance is a sophisticated and complex investment/protection financial tool • On-going service is needed • A permanent par or non-par guaranteed product may better suit some clients. These other options may be best suited for the passive, low risk-tolerant client who does not need flexibility or significant investment options • When minimum funding try not to ‘sell a Ferrari that the client drives around downtown only in 1st gear forever’ • Judge each situation individually

45. Profit from our knowledge www.standardlife.ca

46. Thank you for your time and attention QUESTIONS?

47. Universal Life