Affordable life insurance solution offers protection, guarantee and potential cash value growth
by Mark PetersonMr. 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 Mark.Peterson@aig.com.
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.
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.
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.
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. ◊