Marketing and product development experts have talked about the advantages of indexed life products for nearly 10 years. I remember writing one of the first indexed universal life (UL) prototype proposals in 1997. In the late 1990s, however, many key people in marketing and distribution were not sold on the concept. They had no reason to be interested. Variable universal life (VUL) sales were strong, fixed interest rates on UL products were attractive, and dividend rates for whole life were healthy. In 2006, all of these things have changed, and so has consumer demand for indexed products. Indexed life products "made the turn" in 2005 and have established themselves as a new major product line standing beside UL, VUL, whole life, and term insurance.
Indexed life sales in 2005 were up more than 50% from 2004 levels. Carriers offering indexed life grew from 12 at the beginning of 2005 to 20 at the end of the year, with at least six more companies looking to develop products.*
There are four main reasons for the growth of indexed life:
1. Fixed interest crediting rates on traditional UL and portfolio dividend rates on participating policies find it hard to compete with the long-term 200 to 300 basis point historical advantage of an index-based crediting method. Some traditional fixed carriers, looking for alternatives to compete, recently have entered the indexed life market.
2. Variable life and VUL sales have yet to recover from the record downturn in the equity markets that began in 2000 and continued into early 2003. Variable carriers are looking to indexed life as a possible answer to regain their lost sales.
3. Producers are becoming more familiar with index-based interest crediting. The rapid acceptance of this crediting method in the fixed annuity market is helping to accelerate the demand for indexed products.
4. Most important, consumers like the concept of indexed products. Many of them lost large sums in the market and welcome a product that offers a guarantee of principal from market loss. Millions of consumers in all age groups like the idea of having safe money in their portfolio. A product that is guaranteed never to lose value from a market downturn while also providing the opportunity to receive interest gains based on an indexed-based crediting method is quite attractive.
Indexed single-premium life (ISPL) is a premier legacy asset transfer product built for the 21st century. As the cash value increases over time with the upside crediting of the indexed interest, it increases the death benefit. For example, a female, age 65, non-tobacco user could purchase an ISPL policy with a $50,000 premium and an initial lifetime guaranteed death benefit of $100,000. Based on current indexed interest assumption factors, in 20 years the death benefit could grow to more than $180,000. "Old style" products that credit 4% to 5% interest cannot build this type of increasing value for the consumer.
Traditionally, the most important reason to buy any single-premium life product has been the income-tax-free death benefit. ISPL retains that, of course, and many added advantages you can offer your clients.
Many people are looking for ways to enhance their legacy assets and transfer them in the most efficient manner. Selling this kind of product comes down to two simple questions for your client:
1. Do you have financial assets earmarked that you intend to transfer to a loved one or charity upon your death?
2. Are those financial assets in the most efficient transfer vehicle?
The answers to these questions will help you explore suitable solutions for handling your client's legacy assets.
What Are Legacy Assets?
Legacy assets are dollars your client has set aside to pass to his or her heirs or to a specific post-mortem purpose or charity. The legacy asset transfer market is massive. LIMRA reports that as of Dec. 31, 2005, more than $1.7 trillion dollars were held in deferred annuities. The Federal Reserve, meanwhile, reports that as of March 6, 2006, $1 trillion is held in certificates of deposit (CDs). Studies have found that 85% of total annuity assets will not be used during the annuity owner's lifetime. It is safe to assume that some percentage of CD assets also will pass to heirs or beneficiaries.
At the annuity owner's death, unused annuity funds are paid out to the named beneficiaries, who must pay taxes on any previously undistributed interest gain. CD assets also are taxable. These taxes seriously erode the amount of assets passed to loved ones or a charity.
Here are important questions to ask prospective clients with legacy assets:
o Do you have an annuity, CD, or other accumulation vehicle but do not plan to use those dollars for retirement income?
o Do you own a life insurance policy that might not be performing as expected, or one with the current cash value almost the same as the death benefit?
o Do you have funds to pass on to loved ones or a favorite charity?
o Do you need to take taxable distributions from a qualified account, enhance those distributions into legacy assets, and avoid future taxation, IRS restrictions, and annual monitoring?
Consider the problem of an inefficient tax transfer. Why allow income tax to erode the dollars your client is planning to transfer upon his or her death? If your client does not intend to use those dollars during his or her lifetime, he or she might want to consider ISPL.
For example, if a client owns an annuity with a $50,000 cost basis that has grown to $100,000 of cash value upon death, the $50,000 interest gain would be subject to federal income tax. If the beneficiary is in the 28% tax bracket, he or she pays approximately $14,000 in income taxes.
The classic solution for legacy asset transfer is life insurance. The death benefit of a life insurance policy normally passes income-tax-free to a named beneficiary. The traditional obstacles to buying life insurance are the clients' reluctance to pay ongoing premiums or subject themselves to medical exams and a lengthy underwriting process.
ISPL has these significant advantages for your client:
o The death benefit passes income tax-free upon death.
o A single premium can guarantee coverage for life.
o The death benefit can increase as the indexed cash value grows.
o It's easy to apply for the coverage; the underwriting process is fairly simple, with no exams or blood tests.
o The cash value is accessible if needed for an emergency.
Asset Enhancement Advantage
Another benefit of ISPL is the asset enhancement factor. It is possible to enhance the value of legacy assets by more than 200% instantly based on age, but the enhancement does not stop there. After the first few years, as the cash value begins to grow, the current death benefit also increases based on the movement of the annual indexed interest crediting. The table on page 56 of the May 2006 issue shows a sample of the amount and percentage enhancement based on a $50,000 single premium for a female non-tobacco user. It also shows the initial lifetime guaranteed death benefit and the projected death benefit after taxes in 20 years for the ISPL, an annuity, and a CD.
Application and Underwriting Process
The best-selling products are designed with a simple underwriting and application process, including a tele-application and two simple qualifying medical questions that help identify applicants whose health would disqualify them for coverage. If both questions are answered "no," then producers can submit the application via a toll-free fax line. The company then orders a telephone interview. During the interview, applicants are asked some additional questions to further determine their eligibility for coverage. The underwriter reviews the application package and makes the underwriting decision. Approximately 90% of our initial applications have been approved, with an average single premium of more than $80,000, and the entire process is averaging 3 1/2 business days to complete.
Indexed Product Benefits
The only difference between a traditional UL and an indexed UL is the way that interest is credited. A traditional UL has a rate declared once per year by the company's management. In contrast, an indexed UL credits upside interest based on an indexed crediting formula that is predetermined in the policy. The advantage to the consumer is that the company does not control the upside interest potential of the index. Because these are fixed products, a basic interest rate is credited on a small portion of the cash value. This portion represents the dollar amount required to cover monthly policy charges and the cost of insurance for the upcoming 12 months. The rest of the cash value is credited with any interest at the end of each year based on the upside movement of the index used in the crediting rate formula.
Several indexed strategies usually offered by ISPL policies include monthly average with no cap or fee, annual point-to-point with cap, and monthly point-to point with cap. A traditional fixed account also is offered. The guaranteed crediting rate usually is 2%.
Most ISPL policies include such features as 10% annual penalty-free withdrawals, no-charge benefits for nursing home confinement and terminal illness, and a 10% annuitization bonus if the beneficiary elects to annuitize the death benefit proceeds. Commissions are paid on the entire single premium.
We encourage you to review this kind of "new style" life insurance. ISPL can enhance your customers' legacy assets for the 21st century!
1. Information as reported by Advantage Associates and Advantage Compendium.
Application, underwriting, and indexed product benefits differ by company. The examples and actual results used in this article were based on the AmerUs Life of Des Moines, Iowa, Multi Choice Indexed Single Premium Life policy form 2EBJ05.
Randy Timm, CLU, ChFC, FLMI, is vice president -- product development of Brokers International, Ltd. His 24 years of industry experience include positions in marketing, underwriting, customer service, market research, and product development. He has assisted in developing and marketing indexed products since 1996