K A N S A S C I T Y L I F E I N S U R A N C E C O M PA N Y
For Agent Use Only — Not For Use With Clients
UNIVERSAL LIFE
Agent Sales Guide
Universal Life Agent Guide Matching the Right Product to the Need...........2 Estate and Business Applications......................3 Juvenile Market Applications............................3 Universal Life Product Portfolio Specs..............4 Meeting Buyer Needs.......................................6 Putting Money into the Policy...........................6 Policy Values....................................................7 Death Benefit Options......................................9 Paid-Up Option................................................9 Getting Money Out of the Policy......................9 Taxes on Withdrawals, Reductions and Loans.12 Universal Life Riders.......................................13 UL Annual Reports.........................................15 The Taxation of UL Insurance..........................15 Single Premium Solutions...............................15 Universal Life Q&A........................................17
The time is right to offer clients the flexibility of universal life insurance. Since Kansas City Life Insurance Company’s entry into the universal life (UL) market in the early 1980s, we have continually worked to develop and refine the highly competitive, well-designed products you need to succeed as an agent. Universal life insurance has broad appeal to all types of buyers, regardless of how varied their needs may be. Kansas City Life’s outstanding products and riders fit nearly every sales situation you may encounter. Kansas City Life universal life products include: SuperNOVA ■ FlexWealth Advantage ■ Life Protector ■
Universal life originally was developed in response to the changing needs and demands of modern consumers. At the time, interest rates were high and consumers were looking for the same high returns from their policy values that they were earning on other savings. Many insureds were surrendering their permanent contracts and replacing their coverage with term. Insurance companies were criticized for hiding the true costs of insurance and making products difficult to understand.
Because all of our UL products share similar design features, most meet general market needs. Here we’ve summarized key features of each product.
SuperNOVA
(Client Brochure: Form 1632; Agent Fact Sheet: Form 1633)
There is no other product available today that provides the benefits that universal life does. And that translates into sales advantages for you. You can provide good, overall value to clients by matching Kansas City Life’s product features to their individual situations. Other benefits include: A wide range of commissionable premiums Products for all ages — juveniles, middle years, seniors Up-to-date riders that let you customize protection — including the Monthly Benefit Rider and Enhanced Living Benefits rider
Kansas City Life's UL product portfolio stresses policyowner premium commitment. Often, the decision of which product to buy is determined by the policyowner’s capacity to pay a definite premium for a number of years. By emphasizing the importance of a premium commitment, you ensure the policy benefits are there when needed.
Sales Advantages
■ ■ ■
Annual reports to help you keep in touch with clients Product illustration and sales concept software to aid the sales process
Matching the Right Product to the Need
UL answered these concerns and almost overnight became the standard for policy design in the industry. UL allows for a life insurance program suited to individual needs. It provides a low cost of insurance, competitive rate of return, and the flexibility to change the death benefit and increase or decrease premiums. It truly is an insurance product for today.
■ ■
■ Ultra competitive long-term cash value. ■ High income potential through loans and withdrawals. High payout for retirement income. ■ Great policy issue limits with juvenile issue ages, banding to B1000 and specified amount down to $25,000.
■ Use with business client to protect against loss of key employee using the Option C death benefit, which is the specified amount plus premiums paid.
2
■■ Two death benefit tests – GLP and CVAT – offered at issue.
Estate and Business Applications
■■ ALI rider provides inexpensive term coverage and counts toward the minimum for determining COI bands, loans and bonuses.
SuperNOVA ■ Long-term cash value offers options for small business owners
Life Protector
FlexWealth Advantage
SM
(Client Brochure: Form 2047; Agent Fact Sheet: Form 2048)
■ Coverage to age 120 through premium funding to age 100
■■ Excellent long-term cash values at an affordable price. ■■ Highest interest crediting rate in the Kansas City Life UL portfolio. ■■ Excellent guaranteed preferred loan options that are available in third year with a net cost of 1 percent. ■■ Two death benefit tests – GLP and CVAT – offered at issue. ■■ FlexCash option makes it easy for client to get money out. ■■ High agent compensation and generous asset trail with benefits and contests based on full 50 percent in first year. ■■ Enhanced illustration support for partial surrender and loan handling.
FlexWealth Advantage ■ FlexCash option makes it easy for clients to get money out
Juvenile Market Applications (For issue ages 0 - 20)
UL products for the juvenile market are best used for:
Life Protector
(Client Brochure: Form 2061; Agent Fact Sheet: Form 2062) ■■ Coverage to age 120 through premium funding to age 100. ■■ Guaranteed premiums with flexibility on length of guaranteed period. ■■ Affordable lapse protection with strong secondary guarantees built in. ■■ Seven year surrender charge period.
Savings — education, home down payment
■ ■
Start insurance program — assure future insurability
■
Sales directed to parents and grandparents
Illustrations run on this market should be examined closely. Lapse problems may arise if there is little or no cash accumulation in the year following expiration of the guaranteed payment period. Products available for juveniles: ■ SuperNOVA ■ FlexWealth Advantage
3
Universal Life Product Portfolio Specifications FlexWealth Advantage
SuperNOVA
Life Protector
Risk Class
PENT, PNT, NT, PT, ST
PENT, PNT, NT, PT, ST
PENT, PNT, NT, PT, ST
Issue Ages
Near birthday 0-80
Near birthday 0-85 Preferred risk classes not available at issues ages above 80.
Near birthday 20-80
20-49 50-80
Minimum Issue
PNT SNT ST PENT/PNT/PT
0-14 15-80 15-80 15-49 50-80
PNT SNT ST PENT, PT
$25,000 $25,000 $25,000 $100,000 $50,000
0-14 $25,000 15-49 $100,000 50-80 $50,000 15-49 $25,000 50-85 $10,000 15-49 $25,000 50-85 $10,000 15-49 $100,000 50-80 $50,000
Guaranteed Interest Rate
3.00%
3.00%
3.00%
Guaranteed Payment Period
Issue Ages: 0-14 10 years 15+ 5 years
10 years Does not start over for increases in specified amount.
5 years
Nonguaranteed Bonuses (Credited to Unloaned accumulated Value) See details on Page 7-8
Loan Interest Rate
Accumulated Value Bonus Persistency Bonus Durational Bonus
See note on Page 11.
4.50% (net 1.50%)
Preferred Loan Provision
Yes
Policy Expenses • Percent of Premium
0.00%
• Monthly Expense
$4.00
Accumulated Value Bonus Durational Bonus
Yes
6.00%
$5.00
• Monthly Per Thousand
Current B25, B50: $0.06 all years B100, B250: $0.06 years 1-10; $0.00 years 11+ B500, B1000: $0.00 all years Guaranteed All bands: $0.06 all years
Paid-Up Option
Yes
Surrender Charge Period
15 years
Policy Maturity Date
None
Optional Riders/Benefits Refer to Pages 13 -15 for Rider names and benefit explanations. Not all Riders are available in all states.
Application Form
ADB AI ALI CTI DCOI DPP
A160
Durational Bonus
5.00% (net 2.00%)
6.00% (net 3.00%) No 15.00%
Current B10 $0.06 in all years B50 $0.06 in years 1-10; $0.00 in years 11+ B100 $0.03 in years 1-10; $0.00 in years 11+ B250 $0.01 in years 1-10; $0.00 in years 11+ B500 $0.00 in all years Guaranteed All bands: $0.06 in all years
$4.00
Current Years 1-5: varies by issue age, gender, and risk class Years 6+: $0 Guaranteed Years 1+: Varies by issue age, gender and risk class
Yes
Yes
15 years
7 years
None
Age 120
ADB AGR AI COL CTI DCOI DPP ELB
ELB IAO LBR MBR OI TIR
A160
4
$100,000 $50,000
EXP IAO LBR MBR OI PIR STI TIR
ADB CTI DPP IAO LBR TIR
Automatic Rider: LPR A160
Premium Comparison $1,200
$1,000
$
800
$
600
$
400
Annual Target Premium $100,000 Specified Amount Male and Female Age 35, Standard Nontobacco, Option A
female
$ 200
$
male
0 SuperNOVA
$2,000
FlexWealth Advantage
Life Protector
Annual Target Premium $50,000 Specified Amount Male and Female Age 55, Standard Nontobacco, Option A
$1,500
$1,000
female $500 male
0
SuperNOVA
FlexWealth Advantage
5
Life Protector
Universal life
Once you have these questions answered, you have the information and tools to meet the buyer’s needs and make the sale. What follows is a brief summary of how Kansas City Life’s UL products work.
While no two universal life (UL) products are identical, virtually all of them share comparable characteristics. If you already are familiar with UL and primarily interested in a synopsis of Kansas City Life’s current products, consult the appropriate specifications on Page 4 of this guide. For more detailed information, refer to the Product Guide on the KCL Illustration System.
Putting Money Into the Policy
the products
A prospect has a wide range of flexibility in deciding the amount and frequency of UL premium payments. Once the guaranteed monthly premiums have been paid, there is no further schedule of required premium payments. The policyowner’s only premium responsibility is to make sure there is enough cash surrender value to cover the monthly cost of insurance, expenses and rider charges. Once the cash surrender value in the policy reaches zero, coverage ceases. For Life Protector, the lapse protection feature is in effect only after the initial guaranteed payment period and if the lapse protection balance at any monthly anniversary day is not less than zero. The Lapse Protection Rider premium must be paid for length of desired lapse protection period. The Lapse Protection Rider can assure coverage even if the cash surrender value is zero. Paying the premium late can have a negative effect on the policy guarantees.
Commissions Agent commissions are based on the target premium with a reduced commission rate applied to premiums in excess of the target premium. This creates a wide range of commissionable premiums that can result in higher potential commissions. For complete details, please refer to your agent’s contract or see your general agent.
Meeting Buyer Needs At the point of sale, the buyer selects an amount of coverage, the death benefit option and an amount of premium to be paid. This level of flexibility is the most distinguishing characteristic of UL over traditional policies. You can help the buyer through this process by determining answers to the following questions:
Q. How much life insurance is needed now and in the future? ■ Specified amount? ■ Death benefit option? ■ Additional benefits/riders? Q. How much cash is needed in the future? Q. How much premium is available and for how long?
Options for premium payment include: ■ Regular, periodic payments ■ Single premium ■ Lump-sum premium followed by periodic premium payments ■ Unscheduled payments ■ No payments at all
Premiums may be paid annually, semi-annually, quarterly, monthly (PAC, combined billing, and government allotment) or by single premium. As long as the cash surrender value is sufficient to cover the next month’s cost of insurance and expenses, no premium payments are necessary. The cost of insurance is deducted monthly from the policy’s cash surrender value. Should the buyer discontinue making premium payments or pay an inadequate amount, the cash surrender value could become insufficient to continue the policy and coverage could terminate.
Q. Are any withdrawals or loans going to be made? If so, when and how much?
Q. What current or lesser interest rate does the buyer want you to assume for projection purposes?
Except for SuperNOVA, premiums received for UL are first reduced by a premium expense charge. The resulting net premium is then credited to the accumulated value and begins to earn interest at the current rate.
Q. What other features are important? Guarantees? Cash availability? Amounts for convalescent care or nursing home?
6
How Universal Life Insurance Policies Work Premium payment $
Monthly charges
$
Accumulated Value
$
Loans and withdrawals
Death Benefit
Policy Values
accumulated value and cash surrender value are equal in the year the surrender charge reaches zero.
All current UL products are back-loaded, meaning there is a charge for an early surrender. There are two policy values: the accumulated value and the cash surrender value.
Interest Crediting Interest rates credited to UL policies are determined by the Company and subject to the minimum guaranteed rates of each plan. Rates may vary by plan and the date premium is received. Most plans guarantee rates through the end of the calendar year. For a complete description of credited rates and guarantee periods, see “Information of Interest” published monthly by the Actuarial Department.
Accumulated Value The accumulated value is the net premiums minus withdrawals and monthly deductions, plus interest. Monthly deductions include cost of insurance, rider charges and monthly expenses.
Bonus Feature
Cash Surrender Value
Most of our UL products offer an accumulated value bonus that is credited at the end of the policy year of eligibility.
This is the amount available to the policyowner upon a full surrender of the policy. It is also the amount available for loans and withdrawals. The cash surrender value is the accumulated value minus any applicable surrender charge and any loan and loan interest.
■ SuperNOVA Accumulated Value Bonus For a policy with an unloaned accumulated value exceeding $10,000, a bonus is credited to the unloaned accumulated value. See chart for percentages.
The surrender charge, also called the back-load, consists of the issue expenses and commissions that are usually paid up front in the first policy year on a front-load product. Here, these expenses are deducted as surrender charges only if the policyowner prematurely surrenders or lapses the policy. Back-loading allows a greater portion of the premium to go toward building the accumulated value if the policy is not prematurely surrendered.
Persistency Bonus A 1.0 percent retroactive bonus in years 1-20, with 50 percent of the bonus credited at the end of year 19 and the other 50 percent credited in year 20. Durational Bonus In years 21+, an additional bonus is credited to the unloaned accumulated value. See chart for percentages.
Surrender charges decrease the longer the policy is in force and disappear completely after a specified number of years. If the specified amount is increased, the increase has a new surrender charge. The
7
■■ FlexWealth Advantage
B25
0.25%
N
0.75%
B50
0.25%
N
0.75%
B100
0.25%
Y
0.75%
B250
0.25%
Y
0.75%
B500
0.25%
Y
0.75%
B1000
0.50%
Y
1.00%
Accumulated Value Bonus A bonus of 0.25 percent of the unloaned accumulated value is credited at the end of the every policy year in which the unloaned accumulated value exceeds $10,000 with a current specified amount of at least $250,000. Durational Bonus For a policy with a specified amount of at least $100,000, a bonus of 0.25 percent of the unloaned accumulated value is credited at the end of the policy year, beginning in year 6.
SuperNOVA Policies Issued in Texas and Nevada: Accumulated Value Bonus For a policy with an unloaned accumulated value exceeding $10,000, a bonus is credited to the unloaned accumulated value. See chart for percentages.
■ Life Protector Durational Bonus A bonus of 0.75 percent of the unloaned accumulated value is credited at the end of each policy year beginning in year 11.
Durational Bonus An additional bonus is credited to the unloaned accumulated value. See chart for percentages and eligibility years. Cost of Insurance On each monthly anniversary, the accumulated value of the universal life policy is updated. The cost of Durational Bonus insurance for the net amount at risk and any riders is years 16+ years 6+ years 21+ years 11+ deducted. This monthly processing occurs regardless of whether premiums have been received. The cost B25 of insurance is calculated by multiplying the net amount at risk by the current cost of insurance rate. B50 B100
Expense Charges
B250
A premium expense charge is deducted from most universal life products. It is expressed as a percentage and is deducted only when a premium is paid, resulting in the “net premium.” Monthly expense charges are deducted on all UL products regardless of whether a premium has been paid.
B500 B1000
8
Death Benefit Options
SuperNOVA’s Option C can be considered a return of premium option as the death benefit equals the policy specified amount plus all premiums paid, minus any distributions taken from the accumulated value such as withdrawals or loans. Option C must be elected at issue.
The policyowner may select a level death benefit (Option A), or a death benefit that increases as cash values build (Option B). Choosing Option A helps build cash values quickly while Option B works to maximize death benefits. With SuperNOVA’s Option C, the death benefit equals the policy specified amount plus all premiums paid, minus any distributions taken from the accumulated value (such as loans or withdrawals). As insurance needs change, the client may switch from one option to another.
The policyowner may change the death benefit option or specified amount at any time. However, when increasing the specified amount or changing from Option A or C to B, evidence of insurability may be required. In addition, if the specified amount is increased or the death benefit option is changed on a Life Protector policy, the Lapse Protection Rider will terminate. Remember that reducing the specified amount does not decrease the surrender charge or the amount of the guaranteed monthly premium that is in effect during the guaranteed payment period.
Death Benefit Specified Amount
Death proceeds are based on the coverage option in effect at the time of death. Under Option A, the death benefit is equal to the specified amount. This level death benefit combines a decreasing net amount at risk (pure insurance protection) with an increasing accumulated value.
Paid-Up Option Some UL plans allow the policyowner to purchase a guaranteed single-premium, paid-up policy when the cash surrender value is large enough to purchase at least $5,000 of paid-up life insurance using the guaranteed paid-up purchase factors in the policy. Once elected, a policy endorsement will be issued which details the specific changes to the original contract. After the paid-up option is exercised, the paid-up policy may not be changed back to a premium-paying policy. Loans are available, but withdrawals are not. All riders terminate. The maximum specified amount of the paid-up policy is the specified amount at issue. If there is excess cash surrender value remaining after the purchase of the maximum specified amount, the excess may be paid to the policyowner or used to increase the paid-up specified amount, subject to evidence of insurability.
Under Option B, the death benefit is equal to the specified amount plus accumulated value. The net amount at risk is equal to the specified amount and remains level.
The paid-up option is not available in all states or on all plans.
Getting Money Out of the Policy Death
t
Benefi
Policyowners can access the cash surrender value of their policies through surrenders, withdrawals or policy loans. For complete details, refer to the Product Guide on the Kansas City Life Illustration System.
Surrender
At any time, a policy may be surrendered for its cash surrender value.
9
Withdrawals
Preferred Loan Provision
The policyowner may take a withdrawal at any time, provided the cash surrender value is sufficient to cover the amount withdrawn. At the time of withdrawal: Option A — the specified amount and the accumulated value are both reduced by the amount of withdrawal and a $25 withdrawal charge.
For SuperNOVA, beginning in the 11th policy year, the policyowner may borrow up to the accumulated value less premiums paid at zero-net cost (not to exceed the cash surrender value). Kansas City Life credits to the accumulated value an amount equal to the full loan interest charged. This provision is not guaranteed in the contract. The Preferred Loan Provision may not be available in all states.
Option B and C — the accumulated value and the death benefit are reduced by the amount of withdrawal and a $25 withdrawal charge.
For FlexWealth Advantage, beginning in the third policy year, the policyowner may borrow up to the accumulated value at 1 percent net cost (not to exceed the cash surrender value). This provision is guaranteed. The Preferred Loan Provision may not be available in all states.
Policy Loans
The amount of loan available at any time is: (1) the cash surrender value as of the loan date (which is net of any existing loans and loan interest), less (2) the interest on the new loan to the next policy anniversary. Interest is charged in arrears on the outstanding loan balance. See the UL specification chart for rates. The interest earned on the accumulated value securing the loan is the guaranteed interest rate.
The interest credited to the accumulated value is not used to offset or pay the interest charged on the loan. The accumulated value grows faster than with a regular loan, but if the loan interest is not paid back, it accumulates and is added to the outstanding loan. Kansas City Life’s Illustration System automatically takes the preferred loan feature into account on illustrations of loans on these products.
Premiums paid into the policy are first treated as loan repayments and any remainder is applied as a premium payment. If the policyowner does not want premiums to be paid as a loan repayment, a request in writing must be made.
Loans not qualifying for the Preferred Loan Provision are treated like a normal policy loan as described in the previous section.
10
Universal Life Policy Withdrawals vs. Loans Withdrawal
Loan Repayment Repayment of a loan is not considered a premium; therefore, it is not charged the percent-of-premium load. The payment is applied directly to reduce the amount of the loan.
Replacing money previously withdrawn is considered a new premium; therefore, the percent-of-premium load is charged.
Charges/Costs $25 is charged for each withdrawal.
There is no charge for taking a loan; instead, interest is charged.
Death Benefits/Values Under Option A, a withdrawal immediately reduces the specified amount and accumulated value by the amount of the withdrawal plus the $25 withdrawal fee. Under Option B and C, a withdrawal reduces the accumulated value but the specified amount does not change. However, the death benefit is reduced by the amount of the withdrawal plus the $25 fee.
A loan does not immediately reduce the specified amount but does reduce the accumulated value. If the insured dies while the loan is outstanding, the death benefit is reduced by the amount of the loan plus interest. Repaying a loan restores the death benefit without evidence of insurability. Note: Taking a loan against a Life Protector policy could adversely affect the death benefit guarantees of the policy.
Replacing money previously withdrawn does not restore the death benefit on Option A policies. Evidence of insurability is required to increase the specified amount. Note: Taking a withdrawal from a Life Protector policy could adversely affect the death benefit guarantees of the policy.
Taxes Loans are not currently considered distributions unless the policy is a MEC; therefore, there are no current tax consequences. This may be reviewed by Congress again and the tax consequences could change.
With withdrawals, if a gain is included that gain will be recognized as received, thus avoiding the policy loan tax “time bomb� issue. When making a withdrawal, try to take out only enough dollars so the cash values and death benefit remain fairly level even in later durations.
Taking a loan on a policy can adversely affect the policy. If the loan is too great and, therefore, the interest too high, the policy lapses, and all loans in excess of premiums paid (basis) are taxed. It is phantom income, meaning there is income recognized but no cash flow. The policy lapses, so there are no cash values to call upon to help pay the tax. If a policy matures and has large loans, the owner could have the same tax problem.
For more tax information on UL withdrawals, reductions and loans, see Page 12.
11
Taxes on UL Withdrawals, Reductions and Loans Policy loans are not always tax-free. Also, policy withdrawals or reductions in benefits (particularly the specified amount) made during the first 15 policy years may result in a current taxable gain. Taxation depends on when the policy was issued, the amount of the withdrawal, loan or reduction in benefits, and whether the policy is a MEC. The following table shows the taxation rule that applies in each situation.
Situation
Taxation Rule
Policies issued before Dec. 31, 1984:
Withdrawals or reductions in benefits made any time while the policy is in force.*
FIFO
Loans made any time while the policy is in force.
Nontaxable
Policies issued after Dec. 31, 1984, and policies issued before Dec. 31, 1984, but exchanged for a policy issued Jan. 1, 1985, or after (a policy rollover, 1035 exchange, etc.):
Withdrawals or reductions in benefits made within the first 15 policy years.*
Section 7702 Test All or part of any withdrawal may be taxable. Reduction in benefits may cause a taxable event. Different tax rules and calculations apply to withdrawals and benefit reductions made during the first 5 policy years and for years 6 through 15. [IRC Section 7702(f)(7)]
Withdrawals or reductions made after the first 15 policy years.*
NonMEC — FIFO MEC — LIFO, plus any gain withdrawn prior to age 591/2, will be subject to a 10 percent penalty tax.
Loans made any time while the policy is in force.
NonMEC — Nontaxable MEC — LIFO, plus any gain borrowed prior to age 591/2, will be subject to a 10 percent penalty tax. Additionally, loan interest borrowed from the policy is subject to current taxation.
Definitions LIFO — Last-in, first-out (interest paid out first). Distributions are fully taxable as long as there is gain in the policy. FIFO — First-in, first-out (premium paid out first). Distributions are taxed after all basis is withdrawn. MEC — Modified Endowment Contract. [IRC Section 7702A] Only affects policies issued on or after June 21, 1988 or policies issued before June 21, 1988, where a material change has taken place after June 21, 1988. *Current tax consequences on withdrawals may apply. For more information, contact Advanced Sales/Business Insurance, ext. 8502.
12
Universal Life Riders Not all riders listed here are available in all states. Also, some may not be added once the policy is issued. For complete details refer to the Product Guide on the Kansas City Life Illustration System.
FlexWealth Advantage
SuperNOVA
ADB AGR AI ALI COL CTI DCOI DPP ELB EXP IAO LBR LPR MBR OI PIR STI TIR
13
Life Protector
ADB - Accidental Death Benefit Pays an additional death benefit if the insured dies as the result of an accident. AGR - Automatic Growth Rider Every third policy anniversary after issue, this rider automatically increases the specified amount by an amount equal to 10 percent of the specified amount at issue. Rider terminates when total increases reach the $100,000 maximum, when the policyowner rejects any scheduled increase or if the policy is decreased. AI - Assured Insurability Allows the insured to increase the specified amount, by the option amount or less, at regularly specified option dates, regardless of health. There may be other option dates if certain events occur. ALI - Additional Life Insurance Gives the client the opportunity to maximize the cash value by the purchase of inexpensive additional coverage. Preferred Elite Nontobacco rates available. Maximum is five times base policy amount. Available only at issue. Not available if Other Insured (OI) rider is issued on the primary insured. COL - Cost of Living Provides an automatic increase in the specified amount, without evidence of insurability, based on increases in the U.S. Consumer Price Index. CTI - Children’s Term Insurance Provides level term insurance on each of the insured’s children ages 14 days to 17 years. For each $5,000 of initial specified amount of the base policy, one unit equal to $1,000 of coverage may be pur- chased for each insured child, up to a maximum of 25 units or $25,000. Coverage ceases when the child reaches age 25. CTI offers liberal conversion privileges. DCOI - Disability Continuance of Insurance Continues coverage while the insured is totally disabled by waiving the monthly cost of insurance and expense charges.
DPP - Disability Payment of Premium Pays a monthly premium (a pre-determined amount set at issue) during the total disability of the insured. This rider continues funding when the client can’t so it can accomplish the client’s intended purposes. If the cash surrender value plus the DPP benefit is inadequate to keep coverage in force, an additional premium amount will be paid to the policy (much like a DCOI benefit) to ensure it does not lapse. ELB - Enhanced Living Benefits The ELB rider may allow for prepayment of a portion of the death benefit if the insured needs assistance with at least two activities of daily living or if he or she is confined to a nursing home. Unlike other types of insurance, however, the proceeds paid from the ELB rider have no restrictions or limits on how they are used. EXP - Extra Protection Provides level yearly renewable term insurance on the primary insured only. Preferred rates available. Maximum is two times base policy amount.
IAO - Income Assured Option Allows the owner to choose how the death benefit is paid out. At the time the endorsement is added, the owner designates a Lump Sum Benefit that is immediately paid out at proof of death. The owner also designates an Installment Benefit Amount paid for a designated number of installment benefit years after proof of death. Payments of the Installment Benefit Amount begin one modal period after the Lump Sum Benefit is paid and are paid according to the mode elected. LBR - Living Benefits Rider Gives policyowner access to death benefit proceeds when the insured meets one of two triggering events: (1) terminal illness with a life expectancy of 12 months or less; or (2) nursing home confinement of at least six months that is expected to last until death. No more than $250,000 of the policy’s proceeds may be designated for prepayment. LPR - Lapse Protection Rider Automatically added to the Life Protector Universal Life, the rider provides that policy will remain in force to age 120 if the policy has a positive cash surrender value or the lapse protection balance is not negative. The Lapse Protection feature is in effect only after the initial guaranteed payment period. MBR - Monthly Benefit Rider Designed to replace a family’s lost income due to the death of the primary insured, this rider provides for a monthly income benefit that is payable for a period of time selected at policy issue and automatically increases 3 percent each year during the insured’s lifetime. Multiple MBRs, with different beneficiaries, can be added to a single policy as long as the total benefit does not exceed the specified limits. OI - Other Insured Term Life Insurance Provides level yearly renewable term coverage on the person insured by the rider. Only the primary insured, the spouse, children and/or business associates of the primary insured may be covered by this rider. Preferred rates available. Maximum is two times the base policy specified amount for the primary insured and the maximum for any person other than the primary insured is the specified amount of the base policy. PIR - Pension Increase When part of a pension plan, this rider allows the policyowner to increase the specified amount on each of the regularly scheduled option dates, regardless of health. STI - Spouse’s Term Insurance Provides decreasing term insurance on the insured’s spouse. TIR - Terminal Illness Rider Provides an accelerated death benefit of up to 50 percent of the policy’s specified amount. The TIR benefit is paid to the policyowner if the insured is diagnosed by a physician as having a terminal illness with a life expectancy of 12 months or less. There is no premium charge to add this rider. The maximum amount of accelerated benefits under all policies/riders for a single 14 insured can never exceed $250,000.
UL Annual Reports
In 1988, Congress passed TAMRA, which established new IRC Section 7702A. That section defines a modified endowment contract (MEC). A MEC is a policy which qualifies as a life insurance policy under DEFRA, but fails the 7-pay premium test of 7702A. The death benefit of a MEC is still tax-free, but loans and withdrawals lose their tax-preferred status and are taxed to the extent of gain, just like an annuity.
Each UL policyowner receives an annual report within 30 days of the policy anniversary. This report details the various transactions that took place over the preceding year — premiums paid, expense charges and insurance costs deducted, interest credited, policy riders, changes in the cash value, changes in the specified amount, and any loans or withdrawals. Other descriptive and explanatory material is included to keep the policyowner informed about the performance of his or her policy.
For more information on DEFRA and the 7-pay MEC rules of TAMRA 1988, see www.kclic.net. Under Sales & Marketing Center click on Advanced Sales. Then click on Income Taxation of Life Insurance.
The Taxation of Universal Life Insurance
Single Premium Solutions The Insured Growth Plan (IGP) and Premium Deposit Fund (PDF) provide convenient ways to control large, single premium deposits without creating a MEC.
Historically, life insurance has enjoyed three federal income tax advantages:
■ The death proceeds are excluded from the gross income of beneficiaries.
■ Increases in cash value are not taxed cur- rently to the policyowner.
■ Policy loans and withdrawals are not taxed as long as the policy remains in force.
Insured Growth Plan The Insured Growth Plan (IGP) is a combination of a UL policy and an immediate annuity. The single premium is divided into two parts:
The Tax Reform Act of 1984 (DEFRA) created a permanent, statutory definition of life insurance, IRC Section 7702. This section applies to all forms of life insurance and controls the definition of life insurance for all sections of the Internal Revenue Code. For a life insurance policy to enjoy the three tax advantages mentioned above, all policies, including UL insurance policies, it must meet certain tests as described in Section 7702. These rules became effective for policies issued on or after Jan. 1, 1985. UL policies issued prior to this date are “grand-fathered” and continue to be governed by the rules enacted in 1982. Section 7702 defines the structure of a life insurance policy and the tests it must meet to preserve the tax benefits. A policy must meet either a Guideline Premium/Cash Value Corridor Test or a Cash Value Accumulation Test. We will not issue a policy that violates DEFRA; each policy is checked every year to ensure all policies remain in compliance.
15
1.
An amount equal to the UL annual 7-pay premium is applied to the UL policy in the first year.
2.
The remainder, which must be at least $2,000, purchases the immediate annuity. It provides a payout, starting the second UL policy year, equal to the UL annual 7-pay premium amount.
Premium Deposit Fund The Premium Deposit Fund (PDF) is a rider that is available for all new and existing UL policies. There is no cost for the rider. The PDF is used only to keep a policy in compliance with TAMRA or DEFRA.
IGP vs. PDF Comparison
IGP
Yes
No
2. Are UL renewal commis sions paid as the money is transferred to the UL?
Yes
Yes
3. Is the money transferred to the UL policy automatically?
Yes
No
4. Does the concept involve an annuity?
Yes
No
5. Is there a minimum contribution?
Yes
No
Yes, annuity rules
Yes, annual interest earned
1. Are annuity commissions paid on amounts in excess of first 7-pay UL premium?
Money in this fund earns interest. See the most recent "Information of Interest" for current rates.
6. Is there any tax reporting?
16
Universal Life Q & A
(answers to your important questions) Some typical questions about UL are summarized below. The answers are general in nature and address most UL plans. Some UL plans may have different policy provisions. Please consult the Product Guide of the Kansas City Life Illustration System for complete details about Kansas City Life’s UL policies and their various optional provisions.
Can the policyowner increase the amount of death benefit protection?
How can the policyowner increase cash values? By paying as much premium as DEFRA’s Guideline
Yes, by selecting an increasing death benefit such
Premium/Corridor Test allows. Payments in excess
as Option B or Option C. Or the policyowner can
of premiums required to pay monthly expenses
request an increase in the specified amount at any
build greater cash values.
time, subject to underwriting approval. If the specified amount is increased or the coverage option
Are projected cash values guaranteed?
is changed on a Life Protector policy, the Lapse
No. Illustrations show cash values projected at
Protection Rider will terminate.
1) maximum cost of insurance and guaranteed
Riders also provide a means for increasing death
interest, and 2) current cost of insurance and
benefits. With the Assured Insurability (AI) rider,
current interest. If premiums are paid as illustrated,
the policyowner can exercise purchase options
the values shown under the guaranteed
as they become available. The Automatic Growth
column are the guaranteed cash values.
Rider (AGR) automatically increases the original specified amount by 10 percent every third year
How can the policyowner take money out of the policy?
after issue. Also, the Cost of Living (COL) and Pension Increase (PIR) riders allow for
Through withdrawals, surrenders or policy loans.
scheduled increases in coverage levels.
On all our UL products, there is a $25 withdrawal charge. Surrender charges may apply. Interest is charged on all policy loans. Refer to “UL Policy
Can the policyowner decrease the amount of death benefit protection?
Withdrawals vs. Loans” chart on Page 11 for more information.
Yes, at any time. However, the specified amount may not be decreased below the minimum issue
Withdrawals and policy loans may have adverse
limit. Decreasing the specified amount does not
effects on policy guarantees and cash value
decrease the surrender charge or the amount of
growth.
the guaranteed monthly premium that is in effect during the guaranteed payment period. The policyowner also can switch from Option B or Option C to Option A.
17
Will universal life policyowners receive an annual report on the status of their policies?
after premiums were stopped and the amount, if any, that is withdrawn or borrowed. The Life
Yes, within 30 days of each policy anniversary.
Protector can be designed to allow suspension of
Also, you and/or the policyowner can request a
premium while still guaranteeing coverage to a
status report at other times, if needed.
specified point in the future.
Does the policyowner have to pay a premium?
Can the policyowner take a paid-up policy with universal life?
No, as long as the cash surrender value is sufficient to pay future costs and expenses. But, the
Yes. SuperNOVA, Life Protector and FlexWealth
guaranteed monthly premium must be paid if the
Advantage have the option to become a paid-up
policyowner wants to keep the policy guarantee
policy. This option can be exercised at any time
so it will not lapse during the guaranteed payment
subject to minimum policy size requirements.
period.
The cash surrender value of the policy is used to purchase the amount of the paid-up policy using guaranteed paid-up single premium purchase
Does universal life have an automatic premium loan?
factors. The paid-up option is not available in all states.
No. However, the policy remains in force without premium payments as long as the cash surrender
What is the difference between the Disability Continuance of Insurance (DCOI) rider and the Disability Payment of Premium (DPP) rider?
value is sufficient to pay the various monthly costs.
Can the policyowner suspend the premium on universal life?
When the insured has been totally disabled for six months:
Yes. It’s an especially attractive option for people who will be retiring and want to pay current and
â– The DCOI rider waives the cost of insur-
future policy expenses during their working years,
ance and expenses required to keep the
or for those who want to free up premium dollars
policy in force during the period of disability.
for future coverage needs. Once premiums have
â– The DPP rider pays the disability benefit
been suspended, policy costs and expenses are
amount (determined at issue) into the policy.
This should cover all expenses and add to
the policy values just as though the
Will the policyowner ever have to pay a premium again after suspending the premium?
insured had paid the premium. If the cash
surrender value plus the DPP benefit is
It is possible, depending on the interest credited
inadequate to keep coverage in force, an
to the policy (which will never be below the
additional premium amount is paid to
guaranteed interest rate) and changes to the cost
the policy (much like a DCOI benefit) to
of insurance (which never will be higher than the
ensure it does not lapse.
taken from the cash surrender value.
guaranteed cost of insurance shown in the policy)
18
Can the Other Insured (OI) rider be used to provide additional term life coverage on the primary insured?
If my Life Protector client doesn’t need guaranteed coverage to age 120, can the guaranteed period be shortened, thus reducing the required premium?
Yes, from a minimum of $10,000 to a maximum of two times the base specified amount. OI riders
Yes. The flexibility of this plan allows you to design
also are available for the primary insured’s spouse,
a guaranteed coverage period that best fits your
children and/or business associates from a minimum
client’s needs. When running the illustration, select
of $10,000 to a maximum equal to the specified
the Advanced Premium Guarantee Calculator
amount of the primary insured’s base policy.
from the Premium Calculation Settings menu in the Outlays section of the input screen. Then input the number of years your client wants to pay
What is the difference between the Cost of Living (COL) rider and the Automatic Growth Rider (AGR)?
premiums and the length of the desired guaranteed coverage period. The illustration system will
■ The COL rider automatically increases
calculate the required premium. Please keep in
the original specified amount of the
mind the premium must be paid when due to keep
policy each year based on increases in the
the coverage guarantee in force.
U.S. Consumer Price Index. No commission
is paid on the increases. The maximum of
all increases is the lesser of the original
specified amount or $100,000.
■ The AGR adds future value to the business
you sell by automatically increasing the
original specified amount of the policy by 10
percent every third year after issue. Increases
are fully commissionable. Like the COL rider,
the maximum of all increases is the lesser of
the original specified amount or $100,000.
19
NOTES
20
Security Assured.
TM
3520 Broadway Kansas City, MO 64111 816-753-7000 www.kclife.com
Note: The coverage described in this guide is for the Universal Life portfolio of Kansas City Life Insurance Company (Home Office: Kansas City, MO). Policy forms J168, J169, J173, J174 and J178. Rider forms R102, R211, R123, R192, R207, R121, R208, R191, R204/R224, R175, M652, R181, R221, R209, R213, R127, R210, R160. Form numbers may differ by state. Coverage may not be available in all states.
6753
5.12S