Creative Uses of Traditional

Life InsuranceProducts

Larry R. Gibson, CFAVice President

Capital G Private Wealth Conference

2013

Risk retirees face Introduction to our company

Basic Products

Life Insurance Trust

Creative applications of traditional products

Questions and Answers

Agenda

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BRITISH VIRGIN ISLANDSColonial Insurance (BVI)

Group Medical General Insurance

Life InsurancePensions

CAYMAN ISLANDSBritish Caymanian Insurance

Company LtdGeneral Insurance Provider

British Caymanian Insurance Agencies Ltd

Group and Individual Medical InsuranceGroup Pensions Provider

Life Insurance (Individual & Group)

THE BAHAMASAtlantic Medical Insurance

Group Medical Insurance ProviderSecurity & General Insurance

General Insurance ProviderColonial Pension Services

(Bahamas)Individual and Group Pensions

Provider

BERMUDA (Head Office)Colonial Group International

Manages $390M in pension assets Underwrites $300M in premium

income Capital in excess of $180M

$60M in annual pension contributions

280 staff in 5 jurisdictions

Colonial InsuranceGeneral Insurance Provider

Colonial MedicalGroup Medical Provider

Colonial LifeLife Insurance Provider (Individual

and Group)Colonial Pensions

Group Pensions and Individual Investments

Rated A- (Excellent) by AM BEST

A Large Regional Player – CGI has doubled in size every 5

years since 1979

Colonial Group International

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  Global Insurance Industry        

Total Gross Insurance Premium   4.597 US$ Trillion 2011 SwissReGlobal Premium as % of Global GDP   6.6 Percent 2011 SwissReGlobal Life Insurance Premiums   2.627 US$ Trillion 2011 Swiss ReGlobal Non-Life Insurance Premiums   1.969 US$ Trillion 2011 SwissReGrowth in Life Insurance Premiums   -2.7 Percent 2011 SwissReGrowth in Non-Life Insurance Premiums   1.9 Percent 2011 SwissRe  U.S. Insurance

Industry        Life Insurance Direct Premium Written 166.2 US$ Billion 2011 NAICEmployment in the Insurance Industry 2.3 Millions 2011 BLSDirect Life Insurance Carriers   343.4 Thousands 2011 BLSReinsurance Carriers   26.3 Thousands 2011 BLSInsurance Agencies& Brokerages 644.5 Thousands 2011 BLSDirect Property& Casualty Insurers 528.8 Thousands 2011 BLSDeath Benefits Paid   59 US$ Billion 2009 LIMRAAnnuity Benefits Paid   67 US$ Billion 2009 LIMRA

SwissRe- Swiss Reinsurance- Board of Governors of the Federal Reserve NAIC- National Association of Insurance Commissioners BLS- Bureau of Labor statistics LIMRA - Life Insurance and Market Research Association

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Impact of Global Life Insurance

Industry

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Life Insurance Coverage Gap

Traditional role of Life

Insurance•Upon the death of the insured, Life Insurance can potentially: Create an estate- to help provide finance,

dignity and independence for loved ones, or create a legacy for heirs or for a charity.

or Preserve an estate- settle an outstanding

mortgage, provide a succession plan for a business help settle estate death tax.

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Types of Life Insurance

• Term Life - Protection for a specified period, face amount of policy paid in the event of death. Used when: Need is temporary Need is permanent but insured cannot afford premium for

permanent Life Insurance. Insured wants “pure” protection and invest savings or

investment dollars elsewhere.• Whole Life - Furnishes protection for one’s whole

life. Premiums may be paid… Throughout insured’s life time Over a limited period In one lump sum

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Term Insurance• Level Term Specified level amount of

insurance and level premium for initial period of contract.

• Decreasing Term Death benefit decreases over

period of contract, level premium. Most economical of the three types of Term Insurance.

• Renewable Term At the end of each term (5-10

Yrs) premiums will increase to a higher level, death benefit remains the same. This becomes an expensive plan in later years.

$50,000$40,000$30,000$20,000$10,000 $0

Death Benefit Payable

Age 35 Age 40 Age 45

Premium Rates

30 40 45

Level

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Whole Life Insurance

No CSV in early years

At age 100CSV = Face ValueConstant Face

Value

• Has a savings or cash value component.

• Early years of premium more than enough to pay the current cost of insurance protection.

• The excess makes up the deficiency of premium in later years when annual premium is not sufficient to pay annual cost of insurance. These extra premiums are held by the insurer, creating the “cash value” of the policy.

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Unit Linked vs. Universal Life

• Universal Life Face Value of Policy remains

constant Accumulation Fund (AF)

subject to market risk Projected value of AF may not

be realized Some structures guarantee a

minimum return• Unit Linked/Variable Life

Face Value of Policy varies depending on value of accumulation fund

Policy life could be shortened Contractual Reviews –

important Investment risk with Insured

Initial Face ValueCash Value

Constant Face Value

Reduced Face Value

Cash Value

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Optional riders and benefits

Optional riders and benefits vary from company to company at additional cost. The most common ones are:

•Accidental Death Benefit - Pays twice the death benefit if death occurs by accident.•Accelerated Death Benefit - If diagnosed with a terminal illness with 12 months to live, policy is paid in full.•Convertibility Option - Convert a Term Policy to a Whole Life Policy without proof of insurability. •Premium Waiver - Waives the monthly deduction charges if the insured meets the definition of disability.

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Reality

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•Most persons take out Life Insurance when they become parents or homeowners … but some of the most interesting uses of Life Insurance can come when the kids are gone and the house is fully paid off.

•Basic Life Insurance products can be used to solve many problems that arise upon death or the transfer of assets.

Irrevocable Life Insurance Trust

(ILIT)•Trust which is set up by individual/couple for the

purchase and distribution of Life Insurance proceeds Trust must be irrevocable to be eligible for certain tax

exemptions (vary by jurisdiction…get individual tax advice)

Settler cannot be beneficiary Once the life insurance policy is placed in the trust,

the insured person no longer owns the policy, which will be managed by the trustee on behalf of the policy beneficiaries when the insured person dies.

•Can settle Trust in home or other jurisdiction

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Policy Beneficiary Trust vs. Named

Beneficiary•Life Insurance Trust

Not subject to probate Allows you to leave instruction as to how

payout is used Allows great flexibility in the use of proceeds

•Named Beneficiary Not subject to probate Provides flexibility Need to consider beneficiary’s tax position

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Potential Uses:

•Providing heirs with liquidity Immediate source of cash to settle bills and pay

ongoing expenses Replacing monies lost to taxes e.g. Inheritance

taxes

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Potential Uses:

•Providing a solution to the problems arising from multiple marriages Avoid a ‘battle of the tribes’ Accommodates beneficiaries with differing time

horizons and/or priorities

•Providing for ‘extended’ families Commonplace in certain cultures Separates and preserves the assets of the

‘traditional’ family Preserves anonymity, if necessary

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Potential Uses:

•Providing protection against ‘human capital’ failure What is ‘human capital’ failure?

Premature death Disability

•Providing Creditor Protection

•Providing protection against capital market volatility Provide protection from having to liquidate in

‘adverse’ markets

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Potential Uses:

•Replacing the value of an asset e.g. a home/business Buy/sell agreements Home/Business – leave to one heir…give other

heirs the value of their rightful share Funding for redevelopment of former estate

•Building a Legacy/Funding a Bequest Alumni Gift…buildings, scholarships Donations – Churches, Hospitals, orphanages etc. Favorite Charity

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Potential Uses:

•Forced Heirship Laws Prevalent among civil law jurisdictions and

Islamic countries

•Hedge against expropriation/nationalization of assets Hard assets outside of home jurisdiction

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Potential Uses:

•College Trust Ensures that children/grand children etc. can

have a fully funded education •Financial Security for surviving spouse

In many cases, a couple’s retirement plan is heavily based on the husband’s pension benefit.

But… Survivor benefit is often stopped or significantly

reduced upon death Similarly, healthcare benefits are also reduced

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Thank You

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