Financial : Red Light, Yellow Light, Green Light?

Mike Hesse Assistant Chief Underwriter

September 15, 2017 Overview What Color is the Financial Traffic Light?

. Stop- No offer until financial issues resolved

. Proceed – with caution Secure more information

. Proceed Financially Risk Level is a Continuum Fundamental Questions

. Why?

. What is in force?

. Other applications pending?

. Ultimate Total Line?

3 What Factors Determine the Color?

. Need . Investment . Radically new, bold, creative sale . Clear documentation is key . Company / Amount / Issue Date . Purpose of Insurance . Replacement . Company / Amount / Issue Date . Additional / Competitive

4 What Factors Determine the Color? Needs-Based Protection Against Loss and Current-Projected

. Income replacement . Final . Mortgage . Estate taxes (“death taxes”) . Retirement planning /deferred compensation . Estate equalization

5 What Factors Determine the Color? Needs-Based Protection Against Loss and Current-Projected

. redemption / buy-sell . Key person replacement . Loan coverage . Charitable contribution . Kitchen sink- liquidity . Can consider ‘stacking’ needs (income replacement + mortgage + final )

6 What Factors Determine the Color? Investment and Financial Planning

. protection

. Alternative to low-interest CDs, volatile stock market

. Gift tax exclusion transfer to trust to purchase life insurance on child who married poorly and gambled in the stock market 

7 What Factors Determine the Color? Investment and Financial Planning

. Income with Respect to Decedent (IRA- income tax due at death)

. Guaranteed / current / illustrated rate of return

. Estate planning / transfer during lifetime

. Inside build up advantage for life insurance

8 What Factors Determine the Color? Investment and Financial Planning

. Tax mitigation, deferral, avoidance . STOLI, CHOLI, Surrogate insured . Commission rebating / premium advances / early lapses . Life insurance policy settlements (sales) . Windfall probability / potential

9 What Factors Determine the Color? Income Replacement Does that hat fit?

. Adjustable or Fitted? Current/future needs . Was Head measured? Needs analysis . Within sizing guide? Formula . How much hair under the hat? Earnings stability . Will the hat still fit after ‘haircut?’ Financial setback . How often does client change hats? Replacement

10 What Factors Determine the Color? Estate Planning and Funding the Premium

. Current income . - Liquid? Qualified? . Current . Liabilities? . Selling assets? . Trust funded? . Premium financed . Illustration assumptions . Medical assessment/COI

11 What Factors Determine the Color? Estate Planning-Final Goal? Protect or Create Estate?

. Projection . Rate of return . Life expectancy . Calculator used . Guaranteed rates . Investment track record . Asset control/inheritance . Protection or creation? . Estate calculator

12 What Factors Determine the Color? Key Person-Gauging “Economic Loss”

. Who is Key Person? • Rainmaker • Sole proprietor • Technical expertise, patent holder, special skills/experience Pinterest.com . Low compensation currently BUT • Stock options • share of the company will explode • What is potential economic loss to business? • Lost sales? Customer relationships? Inability to finance debt? • High cost to replace? Business Continuation

13 What Factors Determine the Color? Buy/Sell

. Know all owners and percentage of ownership . Coverage proportionate to ownership Quantafinancials.com . Need 1- 2 years business financials (trend) . Establish the value of the business . Buy/sell agreement should be in place

14 A Word About the Proposed Insured…

. Occupation (Training required? Job market?) . Income: earnings history, ability to document . Net worth- composition . Reality check – income in relation to occupation income average / median . Source of premium • Income + current liquid assets in relation to premium . Beneficiary designated • Relationship • Insurable interest • Financial loss

15 How Was the Sale Made Life Insurance Sales Process

. What was Producer’s role in sale? . In overall financial planning? . Relationship with proposed insured? . Fiduciary Duty vs. Suitability • Client’s interests first, no conflict of interest . How was sale developed? . What facts/analysis were used to determine Financial need?

16 Fiduciary Responsibility The Depp Riddle: Who Should Watch the Money?

. February 1, 2017 - NY Times Business Section Article . Earned $650M in past 30 years . Hired Management Group to oversee his finances in 1999 . Needs to sell significant assets to settle debts and for divorce settlement . Suing advisors- instead of protecting assets, they “engaged in years of gross mismanagement, self-dealing, and at times, actual fraud.” . Firm counter-sued Depp, arguing that it “did everything possible to protect Depp from his own irresponsible and profligate spending”

17 Fiduciary Responsibility The Depp Riddle: Who Should Watch the Money? . Spending: $2M per month; has purchased 14 homes, a French town, a chain of islands in Bahamas, $5.6M interest of overdue taxes, $3M fire cremated remains of Hunter S. Thompson out of a special cannon . Depp didn’t keep track of his accounts, read documents before signing, or question late tax payments for 16 consecutive years . 2015 President Obama- Fiduciary Responsibility “You want to give financial advice, you need to put your client’s interests first” . Others in industry oppose- places entire burden of responsibility on advisors rather than client, who should pay attention, will end up costing consumer more for financial advice . People should bear more responsibility for monitoring their finances and life

18 Financial Considerations

. Financial verification . Financial projections . Financial justification . Financial fantasy . Financial limits • Jumbo limit • Binding limit • Retention limit

19 Financial Justification Rule of Formulas

. Income replacement multiples . Percentage of income allocated to life insurance premium . Percentage of liquid current assets allocated to insurance premium

. Estate planning – net worth projection “Normal” Amount . Key Person multiples . Stock redemption / buy-sell formulas . Deferred compensation formulas . Charitable giving formulas .  Where does amount requested fall on the continuum based on formula?

20 Financial Verification Representations –Most Underwriting is Based on This Information

. Life insurance contract - evidence

. Application representations- part of contract? Need to amend?

. Inspection Reports

. Telephone-interview conducted by Underwriting

21 Financial Verification ● Representations ● Validity ● Depth of Verification ●

. Representation on application . Producer’s report or commentary . Inspection or tele-interview . Mainstream fits the formula assumptions . Consistency . Does it make sense?

22 Financial Verification Expert Opinion

. CPA/ • Credential Verification • Terms/history of association

. Independent Financial Planner/Attorney

. Vested interest in sale (Fiduciary? Suitability? Commission?)

23 Financial Verification Documents

. 1040 Tax return . 4506-T signed- Tax Transcript . W-2 statements . Personal financial compilations . Brokerage statements . Appraisals / business valuations by experts . Business financial statements (BFS)

24 When Do You Need to be Really Sure Before Proceeding? Walkway or Highway?

. Less financial/medical volatility and risk exposure

. MORE: High dollar risk, volatility, reputational risk, regulatory risks

. Potential for Fraud

25 Is the Amount Justified? What Additional Information Might be Helpful?

. How solid are the financials? • Break down of net worth into assets and liabilities? • Assets value been verified as fact? If not, can they be? . Named beneficiaries of policies in force? • Agent states she’ll drop the $500,000 term policy, if necessary, to justify the coverage (expires in 2019) • Does the $100,000 initial premium influence your decision? o Where’s the $100,000 coming from?

26 Financial Documentation Does the Documentation Support the Financial Decision?

. The application

. Financial supplement that may or may not be signed/dated

. The producer

. The producer in role as CPA/financial advisor

. Inspection or phone interview

. Credit reports: ‘risky’ financial behavior not just bankruptcy

27 Financial Documentation Does the Documentation Support the Financial Decision?

. CPA- Credential verified or not? Existing relationship established?

. Private bankers- Willing to talk? Being compensated on the sale?

. Attorneys knowledgeable about finances and planning - Interest in outcome?

. Business financial statements- Does it match Representations?

28 Financial Documentation

Personal . Property records searches

. Brokerage statements

. Zillow.com search results

. Income tax returns or transcripts

. Personal prepared by CPA or Attorney

29 Tax Returns The Good, the Bad, the Ugly

. Supporting schedules needed? • Depends on application $ amount, sources of income • Income-based financial justification/verification • Net worth-based financial justification/verification/inference • Beneficiary-personal or business oName of business oTrust-personal insurance or is trust used for business purpose? . Joint return: whose income is it? . Extraordinary gains, losses (and tax impact) . Average income vs. increasing income

30 Federal Tax Returns Reading the 1040…and Assorted Schedules

. Salaries . Interest . Dividends and Distributions . Capital gains . Sole proprietor business income . Partnership, S corporation income owners-K1 forms-ownership percentage

31 Tax Returns Are Not Always…the Best Option They Don’t Always Show the True Wealth of Folks

. Often don’t include: • Business holdings • Real estate holdings • Financial assets: CDs, , , Bonds, IRAs, 401Ks . Business Insurance: • of business, partnership form only, S-Corp form only

32 Tax Returns Are Not Always…the Best Option They Don’t Always Show the True Wealth of Folks

Net worth verification . Basis of sale is estate protection . Copy of 1040 indicates total income of $98,300 with capital gains / losses showing negative number entry . Capital gains schedule sent in follow-up • Losses actually over $3 million • Limitations on tax reporting limited entry on 1040 • Majority of wealth in privately-held business- o Assets not “documented” by tax returns . “These losses prove my client is wealthy and worth the amount applied for.”

33 Business Financials Scope and Target of the Financial Statements

. Privately held vs. public companies

. Stockholders, investors / current owners / basis for tax returns

. GAAP will show assets based on their historic costs rather than their current market values for items such as land

. GAAP will show other assets at their fair market value such as financial investments

34 Business Financials Evaluation

. Ownership % of applicant . Type • Sole proprietor • Partnership • S corporation • C corporation . Source • Spreadsheet prepared when, by whom, single-year or comparative • Relevance today? • If by CPA o Audited o Review o Compilation 35 CPA Source Business Financial Statements Types of CPA Statements are Not Equal

Audited . The accountant has done extensive analysis, testing and prepared footnote disclosures plus a complete set of financial statements, expressing an opinion, or declining to provide one (red flag) on the fairness with which the financial statements represent the financial position, the results of operations and the changes in financial position. . Generally larger company, expensive, time-consuming

36 CPA Source Business Financial Statements Types of CPA Statements are Not Equal

Review . The accountant has performed fewer procedures and offers less assurance, indicating only that no material modifications have to be made to the financial statements for them to be in conformity with GAAP.

. Materially same result as Audited. Relies on supporting documentation for underlying financial information. Less expensive, quicker- more realistic for small businesses

37 CPA Source Business Financial Statements Types of CPA Statements are Not Equal

Compilation . The accountant pulls together financial information for the company, does no testing for analysis of the financial information, and may not prepare footnote disclosures.

. Compilations are management’s representations, and the outside accountant provides no assurance on the statement.

. Generally provide accurate information (fraud is not common), but not sufficient to support larger face amounts

38 Business Financial Statements

.

.

. Statement of cash flow

39 Balance Sheet Investopedia-5 Tips for Reading Balance Sheet

Balance Sheet- Snap Shot

40 Income Statement Best Foot Forward: Investopedia-Key to Reporting and Predicting Company Earnings

. investor signal- increase to improve profitability, steady trends favorable

. Expenses: • – producing/purchasing goods or services sold • Selling, General & Administrative Expenses - salaries, marketing, overhead • /Amortization

. Profits = Revenue – Expenses- Gross Margin (Profit) is key to sustainability • Operating Profit- profit made from actual operation • Net Income- bottom line after all expenses paid- may be managed to reduce tax liability or propped up to increase earnings per share (and value of Executive Stock Options!)

. Conclusion: analyze company’s profit fundamentals- significant changes in , CGS, and GG&A? favorable- increasing sales, rising margin compare with industry peers

41 Where the Rubber Meets the Road

. How company obtains and spends cash • Borrow to pay creditors? • Earnings for high dividends? . Differences between net income and cash flows: • EBITDA- Earnings Before Interest Tax • Depreciation Amortization o Better indicator – high non-liquid assets, long-term debt o Misleading- short-term debt, no hope for future positive cash flow from operations (e.g. Dot- Com Bubble)

42 Cash Flow Statement Segregates Cash Flows

. Cash Flow from Operating Activities • In- Revenue from sales of goods and services • Out- Payments to suppliers, employee, government, lenders . Cash Flow from Investing Activities • In- Sale property, debt/equity securities (other company), collect principal on loans • Out- Purchase property, purchase securities, lending to other entities . Cash Flow from Financing Activities • In- Issuance/Sale of equity securities in company, issuance of debt securities • Out- Dividends to shareholders, Redemption of long-term debt/capital stock

43 Cash Flow Statement ● Cash is King

. Free Cash Flow is Operating Cash Flow minus Capital Expenditures . Conclusions: • Tougher to fake cash flow than Earnings Per Share (can manipulate earnings) • Negative cash flow could be large investment (or expensive financing!) • Trailing FCF- demonstrates ability to pay creditors/investors and reinvest earnings • Are company’s current business model and sustainable long-term?

44 Business Financials Scope and Target of the Financial Statements

Privately held small businesses . One definition used by business analysts is $5 million or less in revenue / sales . Quality of business financials . Intermixed business and personal assets / liabilities / expenses . Stockholder vs. tax return completion focus

45 Business Financials Scope and Target of the Financial Statements

Multiple business holdings . Independent . Interlinked . Missing consolidated financial statement

46 Business Financials

Slideplayer.com; FourweekMBA.com 47 Business Financials Red Flags- Abridged List

1. Adverse/Qualified Auditor Opinion on cover sheet 2. Negative Cash Flow, restructuring loans to cover shortfalls 3. Cash flow short of covering interest 4. Liens, Material pending lawsuits that my impact financial viability of business 5. New loans at higher than market interest rates 6. Unfavorable Current/Quick ratio (current assets/ current liabilities < 1.0) 7. Increasing receivables, high percentage over 90 days, Factoring (selling AR)

48 Private Companies Vary based on Multiple Criteria . Private companies range from tiny, family-run businesses to very large companies in terms of employees, revenues, and bottom-line earnings . Marketability / liquidity . Minority Interest in privately-held companies should be significantly discounted . Industry or sector trends . Equity vs. debt capitalization . Start-ups: high growth periods, long-term growth mirrors market sector . Finding comparable companies – estimate fair market value (FMV) • A similar business just sold for $15 million,” per broker • Location, number of employees, revenue history, FMV / specific investor value 49 Fair Market Value

. The price at which the property would change hands between a willing buyer and willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts

. OK, where do I find that? • On the producer’s cover letter, e-mail, phone call • On the balance sheet? • On the income statement?

50 Fair Market Value Theory vs. Practice

. Business FMV is based on projected growth rate and investor’s discount for use of money plus degree of risk (sector, this particular business) . Multiple of: • Net income • Earnings before non-cash expenses (depreciation and amortization) • EBIT – earnings before interest and taxes • EBITDA – earnings before interest, taxes, depreciation and amortization • Percentage multiple of gross revenue • Multiple of seller’s discretionary income (SDE)

51 Small-Business Valuation

. Tend to be dependent on owner/manager . Lower quality financial statements that are tax-oriented . Owners reluctant to pay for audited financial statements even when this opens access to credit markets . BFS likely to be limited in time period covered, unlikely to have footnotes or subsequent event coverage

52 Business Valuation Small-Business Valuation

. Have less access to (and pay more for) capital and must rely on infusions of capital from owner family and owner employee . Credit may be from second mortgage on residence . Access to debt capital is more limited and expensive . Owner or related party loans may never be repaid nor is there any intent to repay

53 Business Valuation Small-Business Valuation

. Higher chance of confusing personal and operational expenses and investments . Net income minimization with “excess” owner salary, diversion of funds for nonoperational expenses . Excess cash holding or long-term investment (securities) in excess of business operational needs . Majority owner may personally own other companies receiving rents or other expensed items on company financial statement

54 The Multiple What is the Magic Multiple Number?

. 10x – RGA kept it simple: multiple net income before depreciation and amortization by 10 (EBITDA) . Other guidelines put the business in buckets by classification of growth rate (historical) as projected and perceived risk of investment • Range may be from 4x to 15x • Variables: size, risk, growth period, stability pattern . 50x favored by producers eager to make the sale

55 Start-Up Business Angels and Venture Capitalists

. Angels: individuals / smaller loans . Venture capitalists: individuals or businesses • Firm- help grow/manage business • Hedge Fund- Investor only- limited insurable need . Investment expectations • Higher Risk- Lots of failures- requires higher rate of return than traditional financing • Big hits- growth industries with high future revenue goals • Exit strategy (for profits), although some do run the business for a time • Track record of picking winners? Are they the ‘SMART’ money? . Investment form • Equity • Debt • Combination- Example- Preferred Convertible Stock (Locks in right to purchase shares of stock at discounted price in the event of Initial )

56 Start-Up Business

. Burn rate- Under-capitalized? . Insure cash? Insure ‘investment’ risk? . Pro forma statement value? . Key person economic value? . Experience in this type of business . Past compensation . Total income vs. income from this business . Use of debt investment in company to purchase key person insurance . Premium financing using investment funds in company as collateral (Who’s skin in the game?) • Death benefit itself as collateral for all or part of the ultimate loan

57 Business Valuation Lite One-Person Owner / Family Business . Sole proprietor business – key person role integrated . Net business income impacted / limited by: • Tax focus of • Integration with personal finances / expenses • Creditor protection money moves- collateral assignment • Use of second mortgage on residences as business credit line • Use of credit cards for daily expenses . Value on death – assets marked to current market value • Variance from depreciated value and cost basis used on balance sheets . Sale of business – limited market of would-be investors • Minority ownership discount substantial even if any investor interest • Seller financing

58 Juvenile Insurance Consistent with Family Insurance Program?

. General Guidelines- parents multiple of children . Wealth transfer- well-developed plan, current family financial status . Life Insurance on juveniles as investment- windfall? . Future Inheritance- Best cases: consider discounted future value . Trusts and Business Ownership- assets irrevocably transferred? . Guaranteeing Future Insurability- avoid excessive/anti-selective sales- lapse risk . Reputational Risk: over-insurance on juvenile not in public interest

59 Asset Reallocation – Older Age Efficient Use of Assets vs. Maximize ?

. Traditional insurance need? . Affordability/Over-insurance? . Benefits of Life Insurance: Guaranteed Benefit, Avoid Probate, Avoid Market risk . Concept Risks: Longevity, Funding/Profitability, Litigation . Client profile: liquid net worth, funds not needed to meet daily expenses, STD risks . Producer’s experience using concept, knowledge of client’s financial situation, Fiduciary vs. Suitability role

60 Estate Equalization Farms, Family Businesses, and Unique Assets

. Composition of family net worth- liquid assets?

. Ability to comfortably fund with other assets?

. Nature of assets transferred

. Unequal vested interest by family members

61 Estate Equalization Farms, Family Businesses, and Unique Assets

. Farm, Small Business, Real Estate/Land, unique personal assets . Liquidity needed to avoid distressed sale in illiquid market to settle estate . Asset transfer to next generation already in progress . Protect assets, not Create assets . Client Profile: history of financial planning, non-volatile health, ability to comfortably fund life insurance (no premium financing) . Need to document fair market value of assets and premium source

62 Scenarios True or False  Incomplete or inaccurate disclosure of medical history impacts assessment of financial answers.  Eighty-two-year-old applicants need less money to live on so can spend more on life insurance premium.  Seventy-six-year-olds who transfer CD deposits to life insurance may earn a higher interest rate, but have difficulty accessing cash.  When listing value of asset components, small-business owners tend to give the “book” or equity value of the company on interviews with inspection vendors.  Start-up businesses are likely to fail.  The median income of nail care personnel at beauty salons is $50,000. (Hint: includes part-time workers.)

63 Red Light Examples

. Lack of Insurable Interest or Need

. Unwilling to provide requested Financial documentation- e.g. 4506 Form

. Fraud

64 Yellow Light Examples

. Possible over-insurance/ aggressive stacking

. Multiple pending applications

. Unable to document income

. Weak insurable need

65 Green Light

. Clear insurable need

. Consistent total line

. Consistent/Documented financials

. Full medical/financial disclosure

66 Mixed Signals? Cutting Through the ‘Visual’ Distortion . What factor(s) are most important? . Is one factor a “deal-killer?” . Could case presentation distort information? . Medical issues? . Lack of disclosure? . Competitive issues? . Lack of consistency in documentation? . Comfort level with Producer? . Producer’s relationship to client? 67 Mistakes Mistakes Happen ● INTENT IS KEY ●

. Fill in the Amounts that work for amount applied for . Ambiguity, Complication, Obfuscation . Misrepresentation . Lack of Candor . Fraud

68 No Light? What if There are no Clear Financials Signals?

. Ask questions

. How was the sale made?

. How was the need determined?

. Enough reliable information to support decision?

69 What if There is No One to Ask? On-Line Self-Service or Accelerated Underwriting

. Forensic Underwriting (Book of Business review) . Public data sources . Credit-based data . Look for patterns . Identify largest and most probable risks

70 Case Study 1 Income Replacement

71 Case Study 2 Chronic Pain

72 Case Study 3 Farm/Estate Equalization—Can We Move From Red  Yellow  Green by Adjusting Details?

. M 72 $5M GUL - Farm owner- Widower • Farm value $2.5M- projected value $4M (realistic projection?) • Annual revenue $500K, net loss after depreciation/interest $50K, land value $1.5M, equipment/other assets $1M-long-term debt $500K • Annual adjusted joint income $40K, personal net worth $400K excluding farm- liquid assets $20K • Owner/Beneficiary- Irrevocable Trust- To Be Established • Considering Premium-financing • Medically low-Substandard-due to mild Coronary Artery Disease- 2015- 2 stents credited to STD • 4 children- 2 live in area- will inherit in equal shares per Will at Father’s death 2 live out of state- will inherit other personal assets

73 Case Study 4 Juvenile

74 Case Study 5 Lack of Candor

. Female 79 - $1.5M Indexed UL- Medically STD • Retired, income $100K, net worth $2.5M Owner/Beneficiary Daughter (no details on IF); purpose: Estate planning • Admits $1M IF with same carrier- no date of issue provided • RGA’s records indicate additional $1M IF issued 2014 by another carrier • IAI hits 9/16- 3 hits, 10/16 • Spouse has $50K IF (no details regarding his insurability) • Senior Supplement from other carrier: ADLs ok, drives 5K miles/year- MVR clear, did not complete high school, Get Up & Go- 16 secs • Chronic Interstitial Cystitis- disclosed on part 2 • NTproBNP 115 (<450), Hemoglobin 12.7 (12-16), Urinalysis WNL

75 Case Study 6 Business Coverage

. Outdoor Beverage CEO- M 43 $5M . $5M key person + buy/sell replace $250K IF . Established in 2010 by HS Teacher (Chemical Engineering degree) . Produces concentrated beer/soda drinks for backpacking . $250K key person- issued 2010 – UW reduced from $1M request- STD medically . No Cover Letter submitted . No age/amount or APS requirements submitted

76 Case Study 6 (cont.) Business Coverage

. Personal Financial Statement- net worth $1.1M- cash $300K, cash value . Life Insurance $250K ( on Term?), personal property $500K, no liabilities . annual salary $102K past 2 years, $104K this year . Business Insurance Questionnaire- Founder, holds majority of technical knowledge, key business relationships, no formal buy/sell agreement, no loans, C- Corp, amount determined by market value of business

77 Case Study 6 (cont.) Business Coverage

. Business Financial Supplement- Assets $420K, liabilities $24K . Market Value $15M, PI’s share $7.5M, net losses: 2014 ($600K), 2015 ($650K), 2016 ($315K) . Profit & Loss Statement- 2016- not signed or source provided: Sales $123K, Cost of Goods Sold $144K, gross margin ($21K), Operating Expenses $98K, Staffing Expenses $191K, Utilities $20K, Net Loss ($355K)

78 Case Study 6 (cont.) Business Coverage

. What would you ask? • How as Fair Market Value calculated? • Investment of $7.5M for 50% of company? • How much capital did Key Person invest? • What is economic loss in terms of lost future cash flow, growth in FMV?

79 Case Study 6 (cont.) Business Coverage

. Supporting Financial Documentation • Cover Letter(s)- Producer, CPA, Attorney, Appraiser, Banker • Curriculum Vitae- experience, qualifications, accomplishments: Predictor of future success? • Employment contract- Does it include ‘earn-out’ clause? • Pro-Forma financials • 3rd party? Audited? Reviewed? Compilation?

80 Case Study 6 (cont.) Business Coverage

. Supporting Financial Documentation • Business Plan: Includes investors’ role in managing business (if any) and how business activities will be funded • Financing Prospectus (Equity, Private Debt, or ) • Long-term debt or Line of Credit documentation from Bank • Documentation of upcoming sales booked, capital investment o Is the “Smart Money” investing in business?

81 Case Study 7 “Green Card” . F 31 $100K Term 20 + $250K Whole Life with PUAs- both paid annually- (may be applying for total of $1M) • Resident Alien Card- expires 2021- citizen Vietnam- in US 5 years • Cosmetics Manager at Macy’s for 3 years- income $50K, net worth $100K, Spouse earns $50K • Beneficiary: Spouse Primary, Children 4, 5, 10 • Purpose: income replacement and college funding • April 2016 DUI- Suspended Driver’s License- Reinstated July 2016 • Admits to DUI on Client Interview- ½ beer at birthday parties, application states • Normal labs, negative health history, no ETOH criticisms • RX Check- consistent with health history

82 Case Study 8 Older Age

Asset Reallocation (IRA max strategy) . F 69 $500K Whole Life 95- retired $5K IF • PFS – carrier’s agents focus on financial planning • Income $27K, net worth $500K • IRA gifting $142K, cash/CDs $150K, residence $200K, no liabilities • No illustration provided, but annual premium is $22,810 at STD rates • 1988 Non-Hodgkin’s Lymphoma- no recurrence • Breast calcifications- 7/16 probably benign Ultrasound- postpone for short-interval follow up

83 Matching 1 Match Financial & Medical Scenarios

. Note: Death Benefit $100K (except #3)

1c, 2a, 3b, 4e, 5d 84 Matching 1 Match Financial & Medical Scenarios

. Note: Death Benefit $100K (except #10)

6D, 7B, 8E, 9C, 10A 85 Sunken Treasure

. Male 69 $120M total line- case submitted in 2002 • Internal retention from multiple carriers + facultative reinsurance • Standard medically • Retired- Teacher- earned income $50K • Net worth $200M+ from recovery of sunken treasure recovered while diving in 1998 • Multiple documents “attest” to value of jewels/coins • complete listing with affidavit from Attorney submitted

86 Sunken Treasure

. General Agency refused multiple requests for tax returns . Total $110M issued through 8 direct companies/reinsurers . Policies sold to Investors (IOLI) . Death Claim after 18 months in force- unadmitted respiratory hx- severe COPD . Per Claims- proposed insured was homeless- income less than $10K- no net worth . Lessons: Google, don’t proceed without tax return

87 Jumbo Line-The Big Easy

. Total Line understated- exceeds net worth . Client Letter- ‘Distrusts’ Insurance Companies, but understands Contestable Period and accumulating large amounts of insurance . Real estate business- leveraged (typical for market) . Google reveals additional details regarding context of case

88 Last Exit-Bankruptcy

. M 45 $4.5M Real Estate Developer • Income $1M+ confirmed by 2014 tax return/net worth $25M- no 3rd party verification • $15M IF- replacing $10M and applying for $50M total • Previously had over $65m IF, but multiple policies lapsed during 2008-09 • 2011-2014 Bankruptcy with partner due to reduced real estate value/inability to re- finance highly-leveraged portfolio per Agent Cover Letter

89 Last Exit-Bankruptcy (cont.)

. Partnership ultimately defaulted on $51M+ in debt

. Google search reveals that business partner was killed Jan 2014- captured on parking lot camera • Due to failed repayment of debts ($20K to sub-contractor)?

. Proposed went into hiding in 2014 because he feared for his safety- failed to attend large family wedding

90 ©2015 RGA. All rights reserved.