The Long Run

Look to IUL in Planning for Longevity

Affordable life insurance solution offers protection, guarantee and potential cash value growth

by Mark Peterson

Mr. Peterson serves as Executive Vice President and Chief Distribution Officer, Life Insurance, for AIG Financial Distributors, the U.S. life and retirement distribution organization for American International Group, Inc. (AIG). He can be reached at [email protected]

Longevity can be a double-edged sword: the longer people live, the longer their resources in retirement must last. According to new research1 from AIG, more than half of Americans (53 percent) say their goal is to live to 100 years old. But, even with this optimism for aging, over half of Americans (51 percent) aren’t sure their current retirement savings plan will provide for a 100-year lifespan.

It’s no wonder consumers are searching for peace of mind, especially considering the lack of sufficient retirement savings in America and the many financial concerns that can surface during a long retirement. From escalating personal debt burdens to costly health challenges, clients can face a seemingly endless array of potholes on the road to a secure retirement.

Permanent life insurance that includes (or offers) living benefit riders to help mitigate the financial risks of longevity or a chronic or terminal illness can be a key component of an overall balanced retirement plan. What’s more, an index universal life (IUL) insurance solution that’s designed to offer the potential for significant cash accumulation, as well as protection, flexibility and access to living benefits, may be an optimal solution for the challenges of a long retirement.

Fretting About the Future

Recent Gallup research found that nearly 60 percent of Americans are “very” or “moderately” worried about having money for retirement.2 Furthermore, according to Gallup, more than half of people ages 50-64 years old worry “a great deal” about Social Security, in particular.3 Fears of having insufficient income in retirement are understandable, as Social Security only pays 40 percent of an average earner’s income when he or she retires.4

The Retirement Dilemma

Let’s consider consumers who are near or at retirement ages. Gallup shared that, while most Americans expect to retire at age 66, the average age of the current American retiree is 61. By the time many people reach 615, they just are not prepared financially for the challenges that can surface during retirement – certainly, not a lengthy one. Yet, recent Census Bureau data and Social Security Administration estimates of life expectancy indicate that most Americans may spend 20 or more years in retirement.6 Furthermore, their expenses in retirement may substantially exceed what they’ve anticipated.

That’s why planning far ahead is so vital. When clients secure appropriate financial solutions at least 15-20 years before reaching their sixties, they have the opportunity not only to help ensure financial protection of assets, but also to achieve sufficient retirement income to overcome obstacles, even if they live until 100 or beyond.

Heavy Debt, Health Care Costs

Some consumers are entering retirement with much heavier debt loads than people did in earlier years. In fact, for the average 65-year-old, home mortgage debt rose 47 percent from 2003-20157 (the most recent year for which data has been released). Meanwhile, health care costs have also continued to rise. Consider that for an average, healthy 65-year-old couple retiring in 2018, projected out-of-pocket health care expenses – excluding long-term care costs – are projected to reach nearly $364,000.8

Long-term Care Expenses

When factoring in long-term care costs, ensuring sufficient financial resources for a protracted retirement becomes even more challenging. The cost of a private room in a nursing home now averages more than $100,000 per year, as LIMRA shared in a recent press release.9 Chronic illnesses, which often lead to the need for long-term care, have devastated many people financially, as well as physically.

Some suffer from invasive cancer. Sadly, 42 percent of people who are newly diagnosed with cancer at ages 50+ deplete their entire life’s assets within two years, according to a recent article in The American Journal of Medicine.10

The Harm in Helping Adult Kids

Health care and home mortgage expenses aren’t the only drains on retirement savings. Three-quarters of U.S. parents with adult offspring help them pay debts or living expenses, and by doing so, may be missing out on $227,000 in retirement savings.11

Balancing Needs for Protection and Income

The need for sufficient retirement savings and income can hardly be overstated, especially because the possibility of a very long life brings with it the near certainty of a very long retirement. As outlined above, what could be decades of retirement will present any number of financial challenges that could derail what today might seem like a locked down retirement plan.

As you work with your clients to map out their financial future, the power and flexibility of an IUL insurance contract with living benefits can build toward client objectives and offer a safety net, whether policy holders outlive their retirement income, die before fulfilling their financial legacy or get diagnosed with a costly chronic or terminal illness. An IUL contract may be a wise choice for clients who want life insurance to help protect and provide for their loved ones, but also want to be prepared for the expenses of a lengthy retirement.

Granted, the primary reason for consumers to buy life insurance is to provide a death benefit to their loved ones – the people who depend on them. Still, more people are turning to life insurance for protection, supplemental retirement income, tax diversification and long-term wealth accumulation.

Accumulation-Focused IUL

IUL insurance that’s focused on maximum accumulation, along with protection, is a flexible type of solution that may fit many needs over a long retirement. IUL can provide clients with greater potential for growth than a traditional universal life insurance policy, while safeguarding against market downturns. Withdrawals and policy loans may be structured to provide tax-advantaged income to the insureds, who should always consult their personal tax advisors with questions related to their own particular circumstances.

Not only do IUL policies offer the potential to credit interest based in part on the upward movement of a stock market index, most IUL policies also offer protection against the impact of market downturns. Additionally, some accumulation-centric IUL products offer account value enhancements, such as guaranteed minimum interest crediting bonuses – see specific policy contracts for details.

It is important to note, however, that IUL is not an investment; it is a life insurance product that provides growth potential through index interest crediting. As you might expect, clients cannot invest directly in an index with life insurance products.

Still, modern IUL insurance is designed to provide protection and cash value accumulation, while serving as a multipurpose solution. It’s structured for clients who want:

  • Long-term financial protection for their family or business,
  • Potential to build cash value, with built-in options to access cash if needed, and
  • Living benefits to help in the event of certain chronic and/or critical illnesses.

Why IUL?

When clients purchase an IUL policy designed for both protection and cash value growth, they have the power to choose what works for them. Within the policy guidelines, they can:

  • Pick the death benefit – Select an amount, either level or increasing, that fits their needs over time.
  • Pick the premium amount – As long as certain rules are followed, the premiums can be flexible.
  • Pick the premium frequency – If clients like contributing annually, biannually, quarterly or monthly, any of those options are fine.
  • Pick how the policy’s cash value grows – Insureds can choose from multiple ways to have interest credited on their policy, whether they want the interest allocated to a single index interest crediting strategy or split among multiple interest crediting strategies.
  • Have the potential to access living benefits – Clients whose contracts offer or include accelerated benefit riders may leverage the riders after meeting the eligibility terms.

Over time, if the policy conditions are met, clients will have the opportunity to leverage an array of options to access cash value that has accumulated through premium payments and any interest credited from upside market performance. They can withdraw cash value or borrow against the policy – for example, to supplement retirement income, pay for college or a wedding, cover emergency expenses, buy a vacation home, make home improvements or for any other reason. Alternatively, policy holders can preserve some or all of the life insurance benefit for their beneficiaries.

what could be decades of retirement will present any number of financial challenges that could derail what today might seem like a locked down retirement plan...

Simply put, an IUL product that prioritizes protection, accumulation and flexibility, while offering access to living benefits, enables clients to put their insurance premium dollars to work. Their day job is to support the policy holder’s death benefit. Their night job is to contribute toward potential cash value growth in the contract, while guarding against the financial risks of longevity or serious illness. When clients know such a savvy solution is serving them around the clock and is designed to see them through what could be an extremely long retirement, they may well be able to dismiss financial fears and sleep more soundly. ◊

 

 

 

Endnotes
1. AIG 2019 Plan for 100 Survey, conducted online within the United States by Michael Finke, Ph.D., The American College of Financial Services, in December 2018 and January 2019 among 1,012 U.S. adults ages 40-74 who have at least $50,000 in retirement accounts; https://aig.gcs-web.com/node/43821/pdf
2. Lydia Saad; “Paying for Medical Crises, Retirement Lead Financial Fears;” Gallup; May 3, 2018; https://news.gallup.com/poll/233642/paying-medical-crises-retirement-lead-financial-fears.aspx
3. Justin McCarthy; “Adults Nearing Retirement Worry Most About Social Security;” Gallup; April 6, 2018; https://news.gallup.com/poll/232172/adults-nearing-retirement-worry-social-security.aspx
4. “Learn About Social Security Programs;” Social Security Administration; accessed April 23, 2019; https://www.ssa.gov/planners/retire/r&m6.html
5. Frank Newport; “Snapshot: Average American Predicts Retirement Age of 66;” Gallup; May 10, 2018; https://news.gallup.com/poll/234302/snapshot-americans-project-average-retirement-age.aspx
6. “Annual Estimates of the Resident Population for Selected Age Groups by Sex for the United States, States, Counties and Puerto Rico Commonwealth and Municipios: April 1, 2010 to July 1, 2017;” U.S. Census Bureau; June 2018; https://factfinder.census.gov/faces/nav/jsf/pages/index.xhtml; and “Period Life Expectancy – OASDI Trustees Report;” Social Security Administration; 2018; https://www.ssa.gov/OACT/TR/2018/lr_5a4.html#proj
7. Meta Brown; The Graying of American Debt; Federal Reserve Bank of New York; Feb. 12, 2016; https://www.newyorkfed.org/medialibrary/media/newsevents/mediaadvisory/2016/Graying-of-American-Debt-02122016.pdf
8. 2018 Retirement Healthcare Costs Data Report©, HealthView Services, 2018, http://www.hvsfinancial.com/wp-content/uploads/2018/09/2018-Retirement-Health-Care-Costs-Data-Report.pdf
9. “Joint LIMRA-EY Study Identifies Five Factors Influencing Growth in the Life-Combination Market;” LIMRA; Dec. 3, 2018; https://www.limra.com/Posts/PR/News_Releases/Joint_LIMRA-EY_Study_Identifies_Five_Factors_Influencing_Growth_in_the_Life-Combination_Market.aspx
10. Adrienne M. Gilligan, Ph.D., et al; “Death or Debt? National Estimates of Financial Toxicity in Persons with Newly-Diagnosed Cancer;” The American Journal of Medicine; Vol. 131, No. 10; October 2018; https://www.amjmed.com/article/S0002-9343(18)30509-6/pdf
11. Erin El Issa; “Supporting Adult Kids May Cost Parents $227K in Retirement;” NerdWallet; accessed Nov. 8, 2018; https://www.nerdwallet.com/blog/study-lifetime-cost-supporting-adult-children
Important Consumer Disclosures Regarding Accelerated Benefit Riders
An Accelerated Death Benefit Rider (ABR) is not a replacement for Long Term Care Insurance (LTCI). It is a life insurance benefit that gives you the option to accelerate some of the death benefit in the event the insured meets the criteria for a qualifying event described in the policy. The rider does not provide long-term care insurance subject to California insurance law and is not a California Partnership for Long-Term Care program policy. The policy is not a Medicare supplement.
ABRs and LTCI provide different types of benefits. An ABR allows the insured to access a portion of the life insurance policy’s death benefit while living. ABR payments are unrestricted and may be used for any purpose. LTCI provides reimbursement for necessary care received due to the inability to perform activities of daily living or cognitive impairment. LTCI coverage may include reimbursement for the cost of a nursing home, assisted living, home health care, homemaker services, adult day care, hospice services or respite care for the primary caretaker and the benefits may be conditioned on certain requirements or meeting an elimination period or limited by type of service, the number of days or a maximum dollar limit. Some ABRs and all LTCI are conditioned upon the insured not being able to perform two or more of the activities of daily living or being cognitively impaired.
This ABR pays proceeds that are intended to qualify for favorable tax treatment under section 101(g) of the Internal Revenue Code. The federal, state, or local tax consequences resulting from payment of an ABR will depend on the specific facts and circumstances, and consequently advice and guidance should be obtained from a personal tax advisor prior to the receipt of any payments. ABR payments may affect eligibility for, or amounts of, Medicaid or other benefits provided by federal, state, or local government. Death benefits and policy values, such as cash values, premium payments and cost of insurance charges if applicable, will be reduced if an ABR payment is made. ABR payments may be limited by the contract or by outstanding policy loans.
Policies issued by American General Life Insurance Company (AGL), Houston, Texas. Policy Form Numbers 15646, ICC15-15646; Rider Form Numbers: 13600-5, 15600-7, 15600, ICC15-15600, 15600-5, 13601, ICC13-13601, 82410, ICC18-18012, 18012, 18012N, ICC18-18012, 18012, 18012N, ICC18-18004, 88012, 14306, 07620, 15997, 15996, 15271, ICC15-15271, 15274, ICC15-15274, 15272, ICC15-15272, 15273, ICC15-15273. Issuing company AGL is responsible for financial obligations of insurance products and is a member of American International Group, Inc. (AIG). Guarantees are backed by the claims-paying ability of the issuing insurance company. AGL does not solicit business in the state of New York. Products may not be available in all states and product features may vary by state. Clients should refer to their contracts.
This information is general in nature, may be subject to change, and does not constitute legal, tax or accounting advice from any company, its employees, financial professionals or other representatives. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. Clients should consult a professional attorney, tax advisor or accountant for advice concerning their individual circumstances,
American International Group, Inc. (AIG) is a leading global insurance organization. Building on 100 years of experience, today AIG member companies provide a wide range of property casualty insurance, life insurance, retirement products, and other financial services to customers in more than 80 countries and jurisdictions. These diverse offerings include products and services that help businesses and individuals protect their assets, manage risks and provide for retirement security. AIG common stock is listed on the New York Stock Exchange.
Additional information about AIG can be found at www.aig.com | YouTube: www.youtube.com/aig | Twitter: @AIGinsurance www.twitter.com/AIGinsurance | LinkedIn: www.linkedin.com/company/aig. These references with additional information about AIG have been provided as a convenience, and the information contained on such websites is not incorporated by reference into this press release.
AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. For additional information, please visit our website at www.aig.com. All products and services are written or provided by subsidiaries or affiliates of American International Group, Inc. Products or services may not be available in all countries, and coverage is subject to actual policy language. Non-insurance products and services may be provided by independent third parties. Certain property-casualty coverages may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds, and insureds are therefore not protected by such funds.