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Every Day Applications for IRC Section 1035 Transfers of Life Insurance

Every Day Applications for IRC Section 1035 Transfers of Life Insurance The Advisors Forum July 16, 2008 Teleconference Presented by Frank L. Rainaldi, CLU, ChFC, DAEP and William A. Conway, J.D. SECONDARY NO-LAPSE GUARANTEE OF THE DEATH BENEFIT (SHADOW ACCOUNT GUARANTEE). $500,000.

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Every Day Applications for IRC Section 1035 Transfers of Life Insurance

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  1. Every Day Applications for IRC Section 1035 Transfers of Life Insurance The Advisors ForumJuly 16, 2008 Teleconference Presented by Frank L. Rainaldi, CLU, ChFC, DAEP and William A. Conway, J.D.

  2. SECONDARY NO-LAPSE GUARANTEE OF THE DEATH BENEFIT (SHADOW ACCOUNT GUARANTEE) $500,000 Account Value from illustration (not guaranteed) Guaranteed Shadow Account Value May Be Higher or Lower Than Policy Account Value $10,000 No-lapse Premium Age 60 Age 120 Age 60 Age 120 There is no lapse, even if zero cash value, and premium does not cover policy charges.

  3. No-Lapse Guarantee Illustration (Account Based Guarantee) Guaranteed Shadow Account Positive Value Value Not Provided Via Illustration Positive Value Guaranteed No Lapse Guaranteed (Age 40) Premium $10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 Non-Guaranteed Account Value $3,000 25,000 57,000 103,000 0 0 0 0 0 Death Benefit $500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 500,000 Year 1 5 10 20 30 40 50 55 60

  4. TAX FREE EXCHANGE UNDER IRC SECTION 1035 Mr. Kugler’s Old Policy $500,000 Face Amount 150,000 Cash Value 100,000 Cost Basis Mr. Kugler’s New Policy $750,000 Face Amount 150,000 Cash Transfer 100,000 Cost Basis Tax-Free Exchange Via IRC Section 1035

  5. RESTRUCTURING P0LICY LOANS PRIOR TO AN IRC SECTION 1035 EXCHANGE

  6. Proposed Arrangement

  7. Results and Benefits

  8. Mr. Kugler’s Two Existing $950,000 Face Amount 125,000 Cash Value 0 Loan 0 Cost Basis Tax-Free Exchange via IRC Section 1035 Transfer Mr. Kugler’s New Policy $1,250,000 Face Amount 125,000 Cash Transfer 0 Loan 0 Cost Basis

  9. TAX ASPECTS OF A PARTIAL SURRENDER ON A SECTION 1035 EXCHANGE WITH A BUILT-IN GAIN TO EXTINGUISH A POLICY LOAN Computing the Taxable Gain When There is a Partial Surrender on a Policy with a Built In Gain Shortly Before or Shortly After the Section 1035 Exchange 9

  10. EXCHANGE OF AN OLDER FLEXIBLE PREMIUM POLICY FOR A SECONARY NO-LAPSE PREMIUM POLICY No-Lapse Guarantee Policy Existing Policy $1,000,000 $1,000,000 Pure Life Insurance Pure Life Insurance $255,000 $180,000 Account Value Shadow Account Value Age 70 Age 120 M&F Age 50 M&F Age 70 $9,250 No Premium Required No-Lapse Premium $0 Planned Premium

  11. REVIEW OF LIFE INSURANCE POLICY DESIGN AND AMOUNT TO DETERMINE IF THEY ARE CONSISTENT WITH THE ESTATE OWNER’S CURRENT ESTATE OBJECTIVES Existing Policy $1,000,000 Pure Life Insurance $250,000 Account Value M&F Age 50 Age 70 Current Year M&F Age 95 $9,250 Planned Premium

  12. New Policy $1,500,000 No-Lapse Guarantee Policy Pure Life Insurance $145,000 Shadow Account Value M&F Age 70 Age 120 $9,250 (Plus $250,000 Rollover) No-Lapse Premium

  13. A SECTION 1035 EXCHANGE OF AN ORDINARY LIFE POLICY WITH AN ADDITIONAL INSURANCE RIDER Existing Policy Ordinary Whole Life Policy with Additional Insurance Rider Pure Life Insurance Portion of Paid-Up Additions $1,000,000 One Year Term Insurance Additional Insurance Rider Premium $5,500 Cash Value of Additions $500,000 Pure Life Ins. Protection (Amount at Risk) Base Policy Premium $13,500 $285,000 Guaranteed Cash Values Age 55 Age 100 Age 70 Premium Outlay $19,000 per Year

  14. New Policy with $285,000 Rollover and a Secondary Death Benefit Guarantee $1,000,000 Pure Life Insurance $215,000 Shadow Account Value Age 70 Age 120 Paid-Up Guarantee No-Lapse Premium $6,000

  15. IMPLEMENTING AN IRC SECTION 1035 TRANSFER ON A SURVIVORSHIP LIFE POLICY AFTER THE FIRST SPOUSE HAS DIED At Mr. Kugler’s Death the Survivorship Life Policy Becomes a Single Life Policy Mr. and Mrs. K Ages 60 and 56 $1,000,000 Survivorship Life Policy Owned by ILIT Mrs. K Age 70 $1,000,000 Single Life Policy Owned by ILIT Existing Premium $12,000 At Mr. K’s Death

  16. Exchanging the Existing Policy for a New Single Life Policy Qualifies as a “Like Kind” Exchange Under IRC Section 1035 Mrs. K Age 70 $1,000,000 Existing Policy Owned by ILIT IRC 1035 Exchange $220,000 Cash Value Rollover Mrs. K $1,000,000 New Single Life Policy Owned by ILIT No-Lapse Premium $5,500

  17. A SECTION 1035 TRANSFER OF A NON-PARTICIPATING WHOLE LIFE POLICY TO A POLICY WITH A SECONDARY DEATH BENEFIT GUARANTEE Existing Paid-Up Non-Participating Whole Life Policy $1,000,000 Pure Life Insurance $460,000 Guaranteed Cash Value Age 50 Age 120 Age 65 No Premium Payments Required

  18. New $1,400,000 Policy with $465,000 Rollover and No Required Premium to Guarantee the Death Benefit $1,500,000 Pure Life Insurance $365,000 Shadow Account Age 65 No Premium Payments Required Age 120

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