for Medium-size Estates

Estate Planner’s View of Life Insurance and Annuities

for Medium-size Estates

Michael F. Amoia, JD, LLM (Tax), CFP®, CLU, ChFCVice President, Advanced SalesCrump Life Insurance Services

For Training Purposes Only. Not for Client Use.

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DisclaimerThis information is intended solely for the information and education of those agents doing business with Crump Life Insurance Services and is not intended for use as the basis for legal or tax advice. This information cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on such taxpayer. Any individual should consult with his or her own legal or tax advisors for specific legal or tax advice.

This presentation is not intended to be an opinion and does not contain a full description of all facts or a complete exposition and analysis of all the relevant tax authorities. Information in this presentation was not intended or prepared to be used, and it cannot be used or relied upon by any party for the purposes of (i) avoiding any penalties that may be imposed on any taxpayer by any governmental authority or agency; (ii) promoting, marketing or recommending to any party any transaction or matter addressed herein; or (iii) making any investment decision.ADVM11-1633-B, expiration date July 2012

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Agenda

� Planning Needs

� Understanding Life Insurance Financials

� Detailed Review of Life Insurance Policies

� The Policies� The Policies

� How to Use

� Tax Issues

� Opportunities for Annuities

� Features

� Tax Issues for Non-Qualified

� Hybrid Products – Something New(er)3

Word on the Street

“We’re not multi-millionaires. Why do I need to worry Why do I need to worry about estate planning?”

Client

Influencing the Behavior of Beneficiaries

Wealthy parents have two major concerns:

1. Children are not going to live as well as they do

2. Wealth that parents

5%

Don’t Know

25%

The Same

2. Wealth that parents leave their children is going to spoil them

How do you bridge gap between these twoconflicting interests?

Worse

50%

Source: Where America Stands,CBS News Poll, May 2010

20% Better

Estate Planning Defined

The efficient transfer of your assets to another...

Estate Planning is about managing the Estate Planning is about managing the inefficiencies created by:

� Improper transfers

� Market Risks

� Lack of liquidity

� Taxes

Position the Legacy Plan

Shift emphasis

Taxes Goals / Values

Shift emphasis

Non-Tax Reasons for Planning

� Creditor protection

� Divorce/second marriage protection

� Minor Children

� Spendthrifts

� Special Needs Planning� Special Needs Planning

� Professional Management/Investment Options

� Elder Care Planning

Attorney Howard Zaritsky, as quoted in Wall Street Journal, March 5, 2011, “believes the main benefit of long-lived trusts is that they protect family assets from being dispersed by creditor claims and divorce.”

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The MarketYear Return

1995 38.02

1996 23.06

1997 33.67

1998 28.73

1999 21.11

2000 -9.1120

30

40

50Return

2001 -11.98

2002 -22.27

2003 28.72

2004 10.82

2005 4.79

2006 15.74

2007 5.46

2008 -37.22

2009 27.11

2010 14.87

2011 2.05-50

-40

-30

-20

-10

0

10

Not for Client Use

The MarketYear Return

1995 38.02

1996 23.06

1997 33.67

1998 28.73

1999 21.11

2000 -9.1120

30

40

50Return

2001 -11.98

2002 -22.27

2003 28.72

2004 10.82

2005 4.79

2006 15.74

2007 5.46

2008 -37.22

2009 27.11

2010 14.87

2011 2.05-50

-40

-30

-20

-10

0

10

Not for Client Use

400

500

600

700

Value of $1 Invested in 1950

Value of $1 Invested in 1950

Value of $1 Invested in 1950

Value of $1 Invested in 1950

Historical Period Comparison

11.32%

0

100

200

300

400

Value of $1 Invested in 1950

Value of $1 Invested in 1950

Value of $1 Invested in 1950

Value of $1 Invested in 1950

10.77% S&P 500 TotalS&P 500 TotalS&P 500 TotalS&P 500 Total

S&P 500 PriceS&P 500 PriceS&P 500 PriceS&P 500 Price

8.24%

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Not for Client Use

The “Equity Risk Premium”

S&P S&P S&P S&P 500500500500TotalTotalTotalTotalReturnReturnReturnReturn

Moody'sMoody'sMoody'sMoody'sAAAAAAAAAAAA BondBondBondBondCompositeCompositeCompositeComposite

Geometric Mean ReturnGeometric Mean ReturnGeometric Mean ReturnGeometric Mean Return 11.05% 6.86%Standard DeviationStandard DeviationStandard DeviationStandard Deviation 17.79% 3.06%

Data from 1950-2010

Standard DeviationStandard DeviationStandard DeviationStandard Deviation 17.79% 3.06%

Hist. Observed PremiumHist. Observed PremiumHist. Observed PremiumHist. Observed Premium 4.19% 0%

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Not for Client Use

Key Client Drivers

� Guarantees

� Flexibility

� Control

Life Insurance or Annuity

Life Insurance Life Insurance Life Insurance Life Insurance = Creation of an Estate= Creation of an Estate= Creation of an Estate= Creation of an Estate

Temporary ForeverTemporary ForeverTemporary ForeverTemporary Forever

Annuity Annuity Annuity Annuity = Liquidation of an Esta= Liquidation of an Esta= Liquidation of an Esta= Liquidation of an Estatetetete

Now LaterNow LaterNow LaterNow Later

Carriers Financial Strength Review

Ratings as of October 31, 2011

Carrier Sponsors:

Carrier

A.M. Best

Co. (Best's

Rating,

15 ratings)

Standard &

Poor's

(Financial

Strength,

20 ratings)

Moody's

(Financial

Strength,

21 ratings)

Fitch

Ratings

(Financial

Strength,

24 ratings)

COMDEX

RBC % as of YE

financials

(as of cy 2010)

American General Life (NYSE:AIG) A (3) A+ (5) A2 (6) A (6) 82 467%

Aviva Life & Annuity (LSE:AV) A (3) A+ (5) A1 (5) 87 358%

AXA Equitable Life Ins Co (NYSE: AXA) A+ (2) AA- (4) Aa3 (4) AA - (4) 95 1508%AXA Equitable Life Ins Co (NYSE: AXA) A+ (2) AA- (4) Aa3 (4) AA - (4) 95 1508%

Genworth Life Insurance Co (NYSE: GNW) A (3) A (6) A2 (6) A- (7) 79 532%

ING Life Ins & Annuity (NYSE: ING) A (3) A (6) A2 (6) A- (7) 79 426%

John Hancock Life (NYSE: MFC) A+ (2) AA- (4) A1 (5) AA- (4) 94 731%

Lincoln Financial (NYSE: LNC) A+ (2) AA- (4) A2 (6) A+ (5) 88 492%

Metropolitan Life Ins Co (NYSE: MET) A+ (2) AA- (4) Aa3 (4) AA- (4) 95 593%

Nationwide Life A+ (2) A+ (5) A1 (5) A (6) 87 595%

Principal Life (NYSE: PFG) A+ (2) A (6) Aa3 (4) AA- (4) 91 422%

Protective (NYSE: PL) A+ (2) AA- (4) A2 (6) A (6) 87 455%

Prudential Ins Co. of America (NYSE: PRU) A+ (2) AA- (4) A2 (6) A+ (5) 88 533%

Transamerica Life Ins (NYSE: AEG) A+ (2) AA- (4) A1 (5) AA- (4) 93 401%

United of Omaha A+ (2) A+ (5) A1 (5) 92 411%

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Not for Client Use

History of Life Insurance

According to LIMRA,

that in more than 200 years of American history, no death history, no death benefit has ever been denied due to an insurance company’s insolvency.

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The Basics

Whole

Life

Universal

Life

Variable

Life

Indexed Life

Type of Vehicle

Fixed,Long Term

Fixed,

General Account

Fixed, Equity,

Mutual Fund

Clones

Options plus General Account

Clones

Who Controls Insurance Company

Insurance Company

Policy

Owner

Insurance Company

How Credited Credited as Dividends

Credited as Excess Interest

Credited as Investment Returns

Credited based on Index

performance relative to fixed assets

Understanding the Basics

Premium Contribution

POLICYCASH VALUE

Sales ChargesOverhead ExpensesMortality Charges

Rate of Return

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Product Risk & ReturnProjected Returns Variable UL

Indexed UL

Projected Returns

Measure of Risk

Current Assumption UL

19Slide Provided by Bobby Samuelson of Samuelson Design

The Pitch IULMarket Upside

Long-Term Yield

Advantage

Downside Protection

Advantage Over CAUL

20Slide Provided by Bobby Samuelson of Samuelson Design

Indexed UL Financial Construction

Net

EquityHedges(2.9%)

Equity-LinkedCredits

7% Cap

NetPremium(3% Yield)

GeneralAccount(97.1%)

GuaranteedProductFloor

0% Floor

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Not for Client Use

CARRIER A IN-FORCE DATA

Effective Date Cap Illustrated Rate

01/17/2000 10.00% 7.10%08/01/2000 11.00% 7.50%10/16/2000 12.00% 7.90%12/01/2001 11.00% 7.50%04/01/2003 10.00% 7.10%12/15/2003 11.00% 7.50%02/15/2007 10.00% 7.10%02/15/2007 10.00% 7.10%01/01/2010 9.50% 6.35%

10 Year Average (Spreadsheet) 4.83%

Differential (Illustrated vs. Actual) 152bps to 307bps

Information Provided by Bobby Samuelson of Samuelson Design

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Not for Client Use

The Death Benefit:

To GUL or Not...C om p e t i t i v eC om p e t i t i v eC om p e t i t i v eC om p e t i t i v e l a n d s c a p e l a n d s c a p e l a n d s c a p e l a n d s c a p e –––– t h e “ T i p p i n g P o i n t ” i s g e t t i n g c l o s e r !t h e “ T i p p i n g P o i n t ” i s g e t t i n g c l o s e r !t h e “ T i p p i n g P o i n t ” i s g e t t i n g c l o s e r !t h e “ T i p p i n g P o i n t ” i s g e t t i n g c l o s e r !

CurrentAssumptionProduct A

CurrentAssumptionProduct B

No-LapseGuaranteeProduct

Premium $10,784 $12,803 $12,142

Cash ValueCash ValueYear 20 $109,477 $230,601 $56,608

GuaranteeYear 27 30 45

Male, Age 56, Preferred non-tobacco, 1MM death benefit to age 100.

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Not for Client Use

No-Lapse guarantee market movement in 2011

CarrierCarrierCarrierCarrier Price ActionPrice ActionPrice ActionPrice Action CarrierCarrierCarrierCarrier Price ActionPrice ActionPrice ActionPrice Action

American General + MetLife +

Aviva + Nationwide +

Genworth - Minnesota Life FlatGenworth - Minnesota Life Flat

Hartford + Pacific Life +

ING + Principal +

John Hancock + Protective -

Lincoln Benefit + Prudential +

Lincoln Financial + Transamerica Flat

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HOW IT FITSHOW IT FITSHOW IT FITSHOW IT FITS

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Legacy Planning Needs� Spousal Support

� Estate Equalization

� Blended Families

� One-Way Buy-Sell� One-Way Buy-Sell

� Special Needs Planning

� Same Sex Couples

� Asset Class Planning

Life insurance can provide liquidity, guaranteed and control for each.

The MarketYear Return

1995 38.02

1996 23.06

1997 33.67

1998 28.73

1999 21.11

2000 -9.1120

30

40

50Return

2001 -11.98

2002 -22.27

2003 28.72

2004 10.82

2005 4.79

2006 15.74

2007 5.46

2008 -37.22

2009 27.11

2010 14.87

2011 2.05-50

-40

-30

-20

-10

0

10

Not for Client Use

Life Insurance as Asset Class

Not for Client Use

ANNUITIESANNUITIESANNUITIESANNUITIES

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What is an Annuity?

A Contract to pay...

Annuity

A contract between you and an insurance company, under which

you make a lump-sum payment or series of payments. In return, the

insurer agrees to make periodic payments to you beginning

immediately or at some future date.

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Phases of a Deferred Annuity

AccumulationPhase Payout PhasePhase

Deferred Annuity

Payout Phase

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Accumulation Phase

Traditional Fixed: Pays declared interest rate

Fixed Index: interest is based on performance of an index or indices

Funds are paid into the contract by the owner

Variable: owner selects sub-accounts, interest based on accountperformance.

Deferred Annuity

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Payout Phase

Payments can be distributed for annuitant’s lifetime

Longer of Annuitant’s Life or Certain Period

Payments can be distributed over a period of time

Payment can be based on lifetime benefits rider

Deferred Annuity

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Living Benefits

At an additional cost:At an additional cost:At an additional cost:At an additional cost:

� A guaranteed minimum death benefitguaranteed minimum death benefitguaranteed minimum death benefitguaranteed minimum death benefit, which locks in the amount you can leave your beneficiaries

� A guaranteed minimum income benefitguaranteed minimum income benefitguaranteed minimum income benefitguaranteed minimum income benefit, which guarantees a particular minimum annuity payment

� A guaranteed minimum accumulation benefitguaranteed minimum accumulation benefitguaranteed minimum accumulation benefitguaranteed minimum accumulation benefit, which guarantees a minimum account value at some point in the future (as agreed upon by you and the insurance company).

� A guaranteed minimum withdrawal benefitguaranteed minimum withdrawal benefitguaranteed minimum withdrawal benefitguaranteed minimum withdrawal benefit, which guarantees a minimum stream of income, either equal to the contract principal or for life, providing you withdraw within specified limits over time.

� Access to additional liquidity due to a longlonglonglong----term care situationterm care situationterm care situationterm care situation, such as entering a nursing facility.

The Basics for Non-Qualified

When considering a nonqualified annuity, most clients and many of their advisors (regardless of whether they are attorneys, certified public accountants, or financial professionals) focus on the tax deferral generally available for nonqualified annuities under Code

§ 72.§ 72.

Qualified Distributions

� Age 59 ½ or older,

� Disability,

� Substantial Equal Periodic payments

� SPIA, or

� Death of Non-Qualified Annuity (NQA) owner.

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NQ Deferred Annuities:

Natural v. Non-Natural

Under Code § 72(u), annuities owned by a person who is not a “natural person” do not qualify for tax deferral because they are not treated as “annuity contracts” for income tax purposes (other than for the insurance company provisions of subchapter L).

Non-natural persons would include:

� Trusts

� Partnerships

� Limited Liability Companies

� Corporations

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Exceptions� Annuities acquired by a decedent's estate because of the

decedent's death;

� Annuities held under a plan described in Code § 401(a) (qualified pension, profit-sharing, or stock bonus plans), as a Code § 403(b) tax-sheltered annuity, or as part of an IRA (including SEPs and SIMPLEs);SIMPLEs);

� Annuities purchased by an employer for distribution to an employee or beneficiary on the termination of a qualified plan or tax-sheltered annuity and held until the annuity is distributed;

� Immediate annuities;

� Annuities used to fund a structured settlement under Code § 130; or

� Annuities Annuities Annuities Annuities held as an agent for a natural person.held as an agent for a natural person.held as an agent for a natural person.held as an agent for a natural person.37

NQ Deferred Annuity:

Grantor TrustConceptually, a grantor trust in which an individual is treated as the grantor under Code §§ 671-678 would seem to avoid the non-natural person tax trap.

� Only three private letter rulings involving whether grantor trusts are agents for natural persons appear to have been issued. agents for natural persons appear to have been issued.

PLRs 9316018, 9322011, 9810015.

� In PLR 9322011, the IRS stated that “[w]here a trust holding an annuity contract is a grantor trust, and a natural person is treated as the owner of the trust under [the grantor trust rules], the trust is treated as holding the annuity contract for that natural person under section 72(u)(1).”

This is different for IRAs... � Special Needs Trust, OK

� By Grantor, NO (See 2011 PLR’s) 38

Death of Non-Qualified Annuity Owner

IndividualsIndividualsIndividualsIndividuals named as beneficiaries of non-qualified annuities have three options :

� NonNonNonNon----Spousal BeneficiarySpousal BeneficiarySpousal BeneficiarySpousal Beneficiary

� Distribution of entire contract within five years

� The value of the annuity must be annuitized within one year of the � The value of the annuity must be annuitized within one year of the date of the owner’s death, or

� Lump sum

� Spousal BeneficiarySpousal BeneficiarySpousal BeneficiarySpousal Beneficiary

� The surviving spouse may choose to become the owner of the contract and no distribution is required.

� However, if anyone else is named as a primary beneficiary along with the spouse, then the spousal option of continuing the contract is lost.

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Trust BeneficiariesIn contrast, if a trust trust trust trust is the beneficiary of a nonqualified annuity:

� Code § 72(s) says that the trust must receive the annuity balance within five years of the annuity owner's death.

It cannot stretch the distributions over the life expectancy of one or more It cannot stretch the distributions over the life expectancy of one or more trust beneficiaries or take advantage of the options available to a spouse, even if the spouse is the sole beneficiary of the trust.*

* For nonqualified annuities, the five-year period ends on the fifth anniversary of the triggering death.

**There is no provision under Code § 72(s) and the associated regulations comparable to that of Treas. Reg. § 1.401(a)(9)-4, A-5, which permits a trust named as the beneficiary of an IRA or an employer-sponsored plan including 401(k) plans, profit-sharing plans, SEPs, and SIMPLEs to be treated as a designated beneficiary if certain requirements are met.

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Estate TaxEstate TaxEstate TaxEstate Tax

For federal estate tax purposes, the total value of the contract is subject to estate tax.

Annuities are income in respect of a decedent (IRD) and Annuities are income in respect of a decedent (IRD) and are not eligible for "step-to" in basis at death. Therefore, the annuity is subject to ordinary income tax when distributed.

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Lincoln MoneyGuard®

Reserve Plus policyCD

Hybrid Products

� Control

� No premiums

• Control

• No additional

$100,000 purchase

� No premiums

� Assets for children

� Will this be enough to pay for her long-term care expenses?

Figures based on 60-year-old female, healthy, nonsmoker.

• No additional premiums (one-pay policies)

• Assets for children

• LTC benefits worth multiple times her premium payment

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Not for Client Use

A smarter alternative to self-insuringSM

A money-back guarantee.At any time, your client can request a return of premium, upon full surrender of the policy. The amount received will be adjusted for any benefits paid and any loans and cash withdrawals, and it may have tax implications. The money back guarantee is included in the policy cost through the Enhanced Surrender Value Endorsement, which is available at issue on all single premium policies and flexible premium policies for ages 35 – 65. See Endorsement for complete terms and conditions.

OR

Your client can purchase a Lincoln MoneyGuard® Reserve Plus policy with a portion of cash reserves. The policy remains an asset in their portfolio, and it offers:

* Beneficiaries can receive an income tax-free death benefit under IRC Section 101(a)(1).† Long-term care reimbursements are generally income tax-free under IRC Section 104(a)(3).

for ages 35 – 65. See Endorsement for complete terms and conditions.

An income tax-free death benefit.When the client dies, the policy pays an income tax-free death benefit to their beneficiaries.*

Long-term care benefits.If the client needs long-term care, the policy can provide income tax-free reimbursements for qualified long-term care expenses.†

OR

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Hypothetical case study: Protecting retirement income

OtherLife insurance tocreate a legacy

Portion of savings

$150,000Premium

Hypothetical example only. Benefit amounts will vary by client’s age, health status, and gender (except in Montana, where gender does not affect rates or benefits).

His maximum available benefit is $92,250 per year for six years ($7,687 per month).

Cashsavings

Investments/retirement products

$553,497Income tax-free long-term

care reimbursements$184,499Income tax-free death

benefit for beneficiaries$150,000

Money back guarantee

OR OR

LCN1109-2059094

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LIFE INSURANCE LIFE INSURANCE LIFE INSURANCE LIFE INSURANCE SETTLEMENTSSETTLEMENTSSETTLEMENTSSETTLEMENTS

45

Life Insurance Settlements� Life insurance is no longer needed, or

becomes cost prohibitive, or is not performing as expected

� Insured has outlived risk insured against, business use of life insurance has passedhas passed

� Candidates:

� Over age 65

� Adverse change in health

� $250,000 plus policy death benefit

� No longer wants or can afford

46

Life Insurance SettlementsHow Much?

� Market Value� Difference between the present value of the death benefit and the present value of anticipated premiumsanticipated premiums

� Life expectancy of insured is one of biggest factors affecting the value� Shorter life expectancy means smaller discount will apply to death benefit and fewer premiums will be needed

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Life Insurance SettlementsTaxation

� If true viatical settlement � Terminal – death within 24 months it is tax-free

� Sale of policy� Amount up to basis is tax-free

� Difference between basis and CSV is ordinary income tax

� Any proceeds over and above the greater of basis or CSV is capital gains

48

Life Insurance SettlementsTaxation

� Example

� Policy is sold for $500,000 Total

$275,000BALANCE is

Capital Gains Tax

$500,000

� Tax Basis is $125,000

� CSV is $225,000

Total Sale Priceis

$500,000$125,000BASIS

is Tax-free

$100,000CSV minus BASIS is

Ordinary Income Tax

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Not for Client Use