Clients have begun to understand its value, protection and flexibility
by Mark Peterson
Mr. Peterson is Senior Vice President, Brokerage Distribution for AIG's life business, a part of American International Group, Inc. (AIG). He can be reached at Mark.A.Peterson@aglife.com.As a busy financial professional, you may not be fully focused on recent developments in index universal life insurance (IUL), but polish your lenses.
IUL merits a fresh new look, especially given the meaningful guarantees, remarkable flexibility, and consumer-friendly pricing of the newer breed of IUL product. And if LIMRA research is any indication, IUL’s value proposition has caught the eye of American consumers.
As LIMRA President and CEO Bob Kerzner shared recently, index UL premium soared “an incredible” 36 percent in the fourth quarter of 2014. For the year, it rose 23 percent.
“IUL experienced the strongest growth in absolute dollars for the quarter and the year,” Kerzner said. “IUL now represents the majority of all UL premium, at 51 percent, and in fact, represents 20 percent of all individual life premium.”
He added, “Just to give you a sense of how the UL market has shifted: In 2007, IUL market share was only 7 percent of UL sales, and now, it’s 51 percent. GUL [guaranteed universal life insurance] was 42 percent then — and it’s 22 percent now.”
An historical perspective
Let’s look back to 15 to 20 years ago. At that time, financial professionals primarily used IUL to support client goals of supplementing retirement income.
Today, they’re focusing instead on leveraging the newer form of IUL to help consumers achieve more financial stability during retirement. And achieving financial stability is crucial.
With many defined benefit (DB) plans having gone the way of the 8-track tape, more Americans today are dependent on their own investments through 401(k) plans or IRAs. A drop in account yield, particularly in the first 5 to 10 years of drawdown, has the potential to negatively impact the account's sequence of returns and impair the consumer's financial well-being.
Multiple Interest Crediting Strategies
However, a flexible IUL solution may benefit consumers seeking to counter volatility in their retirement plan. For example, one of the newer IUL solutions features multiple interest crediting strategies that clients can choose from (or combine, if desired).
One option is a volatility control account with interest crediting based in part on a proprietary balanced index account — a combination of the S&P 500® (without dividends) and a 10-year Treasury futures (total return) index. This insurance solution utilizes a rules-based index strategy designed to take out the highest highs and the lowest lows.
And, although it is subject to a participation rate, it allows for an uncapped return to the consumer. In the scenario I’m thinking of, a middle market pre-retiree would fund the IUL contract at a moderate level, with the goal of creating cash value he or she can access, if necessary, to pay certain expenses during a volatile early year of retirement, instead of drawing on the retirement account.
Indeed, a hallmark of the newer type of IUL is that it is designed to give consumers easier access to cash value in their insurance contract. Two different provisions allow for accessing excess cash value in the policy without decreasing the initial death benefit.
For example, if values in the contract surpass benchmark assumptions because of strong index performance, the policy holder has the opportunity to withdraw excess cash value, either in policy year 20 or at age 85, with no reduction in the initial death benefit or to the length of the death benefit guarantee.
Cash Access
Alternatively, if the consumer overfunds the policy to achieve additional, tax-advantaged growth, he or she can withdraw excess premiums in policy year 20, with no reduction in the initial death benefit, if there is available cash surrender value in the policy.
Accessed cash value can be used to purchase additional, paid-up life insurance without further underwriting. If the policy holder chooses, the accessed cash value can be used for any need, including supplemental retirement income. The newer type of IUL solution also offers an early cash value access option with unlocked surrender charges.
If the contract is funded early (for example, through a single-pay premium or a policy transfer from another carrier), the policy holder may withdraw funds above the cumulative benchmark premium in years 3 through 14, to the extent that accumulation value is available, and with no surrender charge penalties. The funds are not locked in.
With a properly structured IUL product, providing the policy holder with access to cash value can be achieved tax efficiently. Be sure, however, to explain to clients before the planning process begins that they should consult independent tax or legal advice when evaluating their own circumstances.
New Living Benefits
Explain to clients, as well, that in addition to ways mentioned above to access cash value, the newer IUL solution offers the potential for living benefits through a chronic illness accelerated benefit rider.
This rider, available at an extra fee, allows policy holders access to a portion of the death benefit, income-tax-free (based on current tax laws), if they meet the rider conditions, including being certified by a licensed physician as chronically ill.
When the rider is triggered (after a 90-day elimination period), the policy holder can take 2 percent or 4 percent of the benefit amount per month, or choose the IRS per diem maximum (as adjusted annually for inflation) to cover medical or virtually any other bills. A waiver of deduction on the entire policy applies as long as the policy holder is on claim.
Ultimately, with the living benefit rider attached, the IUL product offers the death benefit, access to cash to help avoid the sequence-of-returns risk to the retirement plan, and protection against the ruinous financial ramifications of chronic illness. It’s modern life insurance for modern needs.
This reinvented IUL is designed to provide American families with outstanding protection, optionality and value at accessible prices. Consumers clearly are taking a closer look — and alert financial professionals are, too.
endnotes:
1 “LIMRA's First Quarter 2015 Industry Briefing with Bob Kerzner,” LIMRA, Feb. 24, 2015, accessed April 15, 2015 at http://av.limra.com/teleconferences/kerzner-2015-1
2 “The Continuing Retirement Savings Crisis,” Narhi Ree, PhD and Ilana Boivie, National Institute on Retirement Security, March 2015, accessed April 15, 2015 at http://www.nirsonline.org/storage/nirs/documents/Retirement Savings Crisis/retirementsavingscrisis_final.pdf
3 “From Savings to Income: Retirement Drawdown Strategies,” American Institute for Economic Research, 2014, accessed April 15, 2015 at https://www.aier.org/sites/default/files/Files/Documents/Standard/RS20140717_Download.pdf
4 Option election dates are at the end of the 20th policy year (for issue ages 0-64) and the later of age 85 or the end of the 5th policy year (for all issue ages)
5 Option election date is at the end of the 20th policy year for issue ages 0-64 or the later of age 85 or the end of the 5th policy year for issue ages 65-85. Partial withdrawals are reportable to the policy owner and may be taxable. Limitations apply.
