Welcome to our workshop — “All About Life Protection.” My name is _____________ and I am with AXA Advisors, LLC. Before we start the main part of our presentation, let me take a minute or two to outline what we will be talking about today.
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[Read Slide] Life insurance policies have exclusions, limitations and terms for keeping them in force. Various types of life insurance policies have certain types of charges and fees, which may typically include some or even all of the following: cost of insurance charges, surrender charges, administrative fees, mortality and expense risk charges, charges for optional benefits and, in the case of variable life insurance products, investment management fees.
[Read slide with additional examples below] Examples of CREATE an estate: A sum of money that may be used to help accomplish any one or more or even all of the following: Pay off mortgage, car loans, credit card debt, etc. Replace the lost income of the deceased to protect a family’s standard of living Provide for child care while surviving spouse works Provide for the college education of children Endow a favorite charity or school Equalize inheritances among two or more children when certain property or a business interest will be inherited by fewer than all of them Examples of PRESERVE an estate or business: Payment of estate taxes, state death taxes, probate costs — all of which may dilute/diminish the assets remaining for heirs. In case of the death of a business partner, life insurance can be used to fund the purchase of the business by the surviving business owner, who buys the deceased owner’s business interest from the heirs or estate. Example of PROTECT from income taxation: Any cash value accumulation of life insurance is tax-deferred. The death benefit is passed generally tax-free to beneficiaries. Withdrawals and loans will reduce the policy death benefit.
Life insurance is not an investment — not even variable insurance products. It is primarily a protection product. For people who are interested in protection and who would also like to accumulate cash — perhaps even taking advantage of the equity markets — life insurance may be an efficient means for accomplishing both. But it is still always primarily a protection product, and there is a cost for having that protection. Life insurance helps preserve and protect the dignity and financial independence of the surviving beneficiaries, but it is not a tax shelter. There are federal limits on the amount of premiums that can be put into a life insurance policy. When you gamble, you are taking a speculative risk: you might win or you might lose! Death on the other hand is a certainty. Everyone will eventually die. But when? Life insurance is a risk management/risk transfer device that enables carriers to spread the uncertainty of when death will occur and the economic impact of dying among all of the insureds.
Purchasing a life insurance policy may not be as attractive as having a vacation trip; but who wouldn’t want as much of the following strategic benefits they are able to afford: Prudent and economical assurance that a certain amount of cash will automatically be created upon the death of an insured person, regardless of how soon or unexpectedly death occurs. • Federal and state income tax free to the extent that death benefits are paid in lump-sum to the beneficiary. • Estate tax free if the policy is owned by a named party (other than the estate of the insured). • Not subject to probate to the extent that death proceeds are paid to a named beneficiary (other than the estate of the insured). • Generally not subject to the lien of creditors of the insured or beneficiary (it varies by state). • Fast payment of the death proceeds to the beneficiary — usually within days* of receipt of the death-claim notice and death certificate (assuming death occurs after the two-year incontestable period). Please note that withdrawals and loans reduce the policy’s cash value and death benefit, increase the chance that the policy may lapse, and may cause tax consequences. Life insurance is the ONLY financial product that delivers all of these benefits. *[Note to presenter: In case audience ask how many days to be exact, AXA Equitable records show three business days in general, five to seven business days in some cases. Other insurance carriers may be different.]
Cash Value The primary reason to purchase life insurance is for the death benefit it provides beneficiaries. However, certain policies also provide cash value. Under current tax law, if premium payments and certain policy transactions stay within IRS guidelines, permanent life insurance is the only financial product that enjoys all these key tax advantages . . . for as long as the policy remains in effect: • Tax deferral of policy cash value • Tax-free withdrawals until basis (cumulative premiums) is recovered, if not a modified endowment contract • Tax-deferred loans of policy cash value — even if total policy loans exceed basis • Tax-deferred stream of income (i.e., retirement income) using withdrawals up to basis, then switching to loans — not subject to income taxation for as long as the policy remains in effect • Tax-free stream of any income and gains if the policy remains in effect until the death of the insured • No IRS limit on amount of life insurance you can own, and you can enjoy all the above tax advantages — provided your premiums and cash values do not exceed a certain ratio to policy death benefits Note that under current federal tax rules, you generally may take income-tax-free partial withdrawals under a life insurance policy that is not a modified endowment contract (MEC)** up to the basis in the contract. Additional amounts are subject to federal income tax. Loans taken will be free of current income tax as long as the policy remains in effect until the insured’s death, does not lapse and is not a MEC. This assumes the loan will eventually be satisfied from income-tax-free death proceeds. Loans and withdrawals reduce the policy’s cash value and death benefit and increase the chance that the policy may lapse. If the policy lapses, is surrendered or becomes a modified endowment, the loan balance at such time would generally be viewed as distributed and taxable under the general rules for distributions of policy cash values. Pre-age 59 1/2 penalty tax provisions apply to contracts classified as MECs. Withdrawals from MECs, prior to age 59 1/2 may be subject to a 10% federal income tax penalty. ** The tax-advantages accorded life insurance cash values are governed by the Internal Revenue Code and IRS regulations. IRS regulations limit the amount of premium that can paid into a life insurance policy. They also require that a certain amount of death benefit be provided by the policy in relation to its cash value. Adverse tax consequences could result if these limits or certain other conditions required by the regulations are not adhered to, the most common of which is the policy becomes classified by the IRS as a "Modified Endowment Contract." AXA Equitable Life Insurance Company and its affiliates in the US administer policies on a basis that prevents policyowners from unintentionally overstepping these limits.
Cash Value The primary reason to purchase life insurance is for the death benefit it provides beneficiaries. However, certain policies also provide cash value. Under current tax law, if premium payments and certain policy transactions stay within IRS guidelines, permanent life insurance is the only financial product that enjoys all these key tax advantages . . . for as long as the policy remains in effect: • Tax deferral of policy cash value • Tax-free withdrawals until basis (cumulative premiums) is recovered, if not a modified endowment contract • Tax-deferred loans of policy cash value — even if total policy loans exceed basis • Tax-deferred stream of income (i.e., retirement income) using withdrawals up to basis, then switching to loans — not subject to income taxation for as long as the policy remains in effect • Tax-free stream of any income and gains if the policy remains in effect until the death of the insured • No IRS limit on amount of life insurance you can own, and be eligible for all the above tax advantages — provided your premiums and cash values do not exceed a certain ratio to policy death benefits Note that under current federal tax rules, you generally may take income-tax-free partial withdrawals under a life insurance policy that is not a modified endowment contract (MEC) up to the basis in the contract. Additional amounts are subject to federal income tax. Loans taken will be free of current income tax as long as the policy remains in effect until the insured’s death, does not lapse and is not a MEC. This assumes the loan will eventually be satisfied from income-tax-free death proceeds. Loans and withdrawals reduce the policy’s cash value and death benefit and increase the chance that the policy may lapse. If the policy lapses, is surrendered or becomes a modified endowment, the loan balance at such time would generally be viewed as distributed and taxable under the general rules for distributions of policy cash values. Pre-age 59 1/2 penalty tax provisions apply to contracts classified as MECs. Withdrawals from MECs, prior to age 59 1/2 may be subject to a 10% federal income tax penalty. 1
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[Refer everyone to the Needs Analysis Worksheet handout]
[Quickly walk through the calculations]
[Read slide] Since every individual’s financial situation and goals are different, a comprehensive analysis is an essential part of determining the appropriate strategy for each. If you are interested, an AXA Advisors financial professional could provide a complimentary review for you.
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[Read slide plus notes below] If the need for protection is temporary, a term product could be the most economical vehicle. The terms of Term Life policies vary from company to company. Each has different restrictions on renewal age cap, etc. You need to select carefully to ensure that the policy you purchase really suits your needs.
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[Read slide along with the following notes] • Federal tax regulations prescribe limits on the amount of premiums that can be paid into life insurance polices. If kept within those limits, cash values accumulate tax deferred. • Even if a lot of gain is taken out of the policy on a tax-deferred basis, if the policy remains in effect until death, then the income that was received tax deferred becomes permanently tax free upon death of the insured. • However, if the policy ever lapses, any gain becomes immediately taxable as ordinary income.
[Read slide along with the following notes] • Premium flexibility is great, but should be regarded cautiously, since the policy only lasts for as long as there is a Policy Account Value to cover the monthly deductions. Until the policy has accumulated a significant Policy Account Value, reducing or skipping premium payments may not be advisable.
[Read slide along with the following notes] • Note that the policy loan is NOT interest free.
Variable universal life insurance is a type of life insurance that provides permanent protection to your beneficiary upon your death. This type of life insurance allows you to allocate a portion of your premium dollars to a separate account comprised of various investment portfolios, such as an equity fund, a money market fund, a bond fund, or some combination thereof. You can make your own choices of the allocation on a variety of choices and can change them under certain restrictions. Variable life insurance values will fluctuate based on the underlying investment options. Your Policy Account Value may be worth more or less than the premiums you paid. It is best for people who have a tolerance and willingness to accept the (very real) investment risks in order to participate in the long-term potential rewards of the equity market. Unlike UL, where the consumer would at least get the guaranteed interest rate (typically 2 to 3%) credited to his or her policy’s Policy Account Value, with VUL, consumers can actually lose all of their principal (and possibly their insurance as well) as a result of adverse market performance unless there are no-lapse features. All variable life insurance investors should carefully consider the charges, risks, expenses and investment objectives of these products before making their purchases and investments. 1 2
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Survivorship life insurance is one policy for two co-insureds. In a survivorship policy, the death benefit is not payable until the second death occurs. No benefit is payable on the first death. Typically, a survivorship policy requires 35% to 55% less premium than purchasing individual polices on each of the two insureds,* but taking advantage of these savings is only practical if the death benefit is not needed at the time of the first death. Who would want this type of coverage? People who want to preserve their estates. Upon someone’s death, assets left to a surviving spouse are not taxed — which results in estate taxes being paid on the second death. Life insurance can be a prudent and efficient source of funds to pay the taxes, thereby preserving the most for the heirs. Using survivorship life insurance in this instance can be the most prudent and efficient form of life insurance to meet this particular need. Note that under EGTRRA, the estate tax disappears in the year 2010; but unless Congress makes the estate tax repeal permanent, the estate tax reappears in 2011. How about those two-income families where either spouse’s income alone is sufficient to support the family? They could take advantage of the savings and have the insurance protection if both spouses were to die prematurely. Another example would be a situation where two family members insure themselves with a trust set up to provide for a special needs family member as the beneficiary. * Based on comparison of AXA Equitable policies.
[Read slide with notes below] ADLs include: • Bathing, dressing, eating • Continence — being able to maintain bowel and bladder control • Toileting — getting to and from the toilet and being able to perform the associated personal hygiene • Transferring — being able to move from a bed to a chair, for example
As you can see, there are many different types of insurance. Each has its own particular features. There is no BEST solution for all. Everyone has a different financial situation and different protection goals and needs. The most appropriate strategy for YOU may be a combination of the policies mentioned.
What do you do with the new information you’ve learned today? You can make it a point to devote yourself to making your own decisions about your protection strategies. But you may not know all of the products and strategies to implement your decisions. In my role as an AXA Advisors financial professional, that’s where I come in. Our aim is to empower you to make informed decisions toward pursuing your specific goals. We help you identify and prioritize your financial aspirations, and offer guidance specific to you. You choose the strategies that work best for you, and we’ll help you implement them. We know that planning is more than talk, it’s about you and your family, your dreams and aspirations.
Finally, I (we) have two favors to ask of you. The first favor is that you complete the evaluation form provided both honestly and candidly so that we might improve our workshop for others. The second favor is that you sign up for an initial consultation with us. I’ll explain more about this after the presentation, but we provide a no-cost, no-obligation consultation for you to determine if we can be of service to you on an individual basis. We find that many of those who attend our briefings do sign up for an initial consultation. We are interested in forming working relationships with many of you, and many of those who come in, do become clients. Thank you, and we look forward to working with you.
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