From the November 01, 2006 issue of Agent’s Sales Journal • Subscribe!

Learning the Ins and Outs of IUL

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November 1, 2006 • Reprints

Variable life insurance used to be the shining star of the life insurance industry. It was a product that agents loved to sell and clients loved to buy. As a routine part of the variable sale, each client was asked to complete a risk-tolerance profile gauging their level of risk aversion. By signing this profile, clients indicated that they fully understood that their account values could decrease as well as increase and that they were comfortable with their decision to purchase the variable product. For many, that comfort level lasted until the stock market began to travel south for an extended period of time.

This situation creates a perfect opportunity for you to introduce indexed life insurance to those variable clients whose hands shake as they open their quarterly statements. Indexed life offers them the opportunity to take advantage of higher returns during times when the market is rising, without incurring any risk in the event of a market downturn. Not only does the insurance company assume all of the downside risk, it also provides a guaranteed minimum interest rate on each policy. And best of all, you don't need a securities license to sell the indexed life products.

Who is the ideal client?

The same people who are variable life clients are good candidates for IUL, as indexed life products offer upside growth potential. Also, the same people who are fixed life clients may like the product, as indexed life has a guaranteed interest rate and is considered a fixed life product.

Choosing a product

Several companies offer IUL. Each will feature different caps, minimum guarantees, and participation rates. Some even include no-lapse protection guarantees on the death benefit portion of the contract, and there are also lifetime protection riders and the option to withdraw account value that exceeds the annual target premium without a surrender penalty.

Ideal products for young executives are those that make taxes work for instead of against them. A 40-year-old male, preferred nonsmoker, depositing about $7,000 per year until he turns 65 receives a minimum non-medical death benefit of around $350,000. At age 65, assuming a yield of about 8 percent, this would create income-tax-free income of somewhere around $27,000 annually for 20 years. The effective yield on the cash value for the 20-year accumulation period is close to 6 percent.

IUL can also be used as part of a wealth-transfer strategy in the senior marketplace (see the case study on page 28 for an example of how this works). With today's medical improvements, people are living longer. We also know that health care costs are on the rise and for the foreseeable future will not slow down. Given these variables, coupled with the fact that many universal life contracts do not provide immediate liquidity because of surrender charges and other policy fees, some clients may be a little shy about purchasing a traditional paid-up life insurance policy in an effort to transfer their "safe money" to their heirs. Furthermore, the trend in the UL marketplace is toward no-lapse guarantees. By their design, these contracts don't do an effective job of building cash. Even in a wealth-transfer strategy, it can be quite disconcerting for clients to watch a large cash asset dwindle to zero over a number of years. Therefore, seniors may be interested in IUL since it provides an income-tax-free death benefit, tax-deferred accumulation, downside protection, income-tax-free loans if needed, and liquidity.

So whether you are supplementing retirement income with income-tax-free money or securing a senior's retirement and legacy, IUL is a versatile tool that can help your clients achieve their objectives.

Joe Stamps is director of Life and LTC for Covenant Reliance Producers, LLC. He can be reached at jstamps@crproducers.com or 866-907-4275.


An IUL Case Study
The following sales idea illustrates that by using an IUL wealth-transfer strategy, you can help your clients leverage their safe money, minimize taxation, and maintain liquidity so that they can access their money in the event of an emergency.
The problem
JoAnn Wilson is 72 years old, widowed, and has three children. She has $100,000 invested at a local bank in various CDs and savings accounts. JoAnn also has various forms of income that she utilizes for retirement. She is satisfied with her current income and would now like to develop a plan that allows her to transfer her wealth to her children when she dies, and she would like to do so without creating a financial burden for them. JoAnn is hesitant, however, to structure a wealth-transfer plan at this time because of increasing health care costs. She would like to maintain liquidity in her wealth-transfer plan so that she can access the monies in the event of an emergency.

JoAnn has high blood pressure and adult-onset diabetes, which are both controlled with medication.
The solution
Given JoAnn's needs, a possible solution would be to use an IUL with a waiver of surrender charges rider. She agrees to leverage part of the money she has invested with the bank so she can provide a larger inheritance for her children.

JoAnn decides to put about $75,000 into an IUL. To avoid the contract becoming a modified endowment (which would diminish the tax advantages), she puts the money into the insurance company's advance premium deposit account and spreads the payment to approximately $15,000 per year for about five years.

Because of the company's Table 4 to Standard shave program, JoAnn receives standard rates despite her high blood pressure and adult-onset diabetes. The illustration shows a little more than $132,000 is immediately available as an income-tax-free death benefit for her children. In the event of an emergency, JoAnn would have access to the entire cash value because of the waiver of surrender charge option. She can access the cash by withdrawals or by income-tax-free, contractually guaranteed loans after the sixth policy year.

JoAnn has confidence in her wealth transfer strategy. She can't lose her principal. In fact, she has very real opportunity for potential gains. She has immediate access to her cash. And the cash has been leveraged to provide a larger inheritance for the children.
Do you do search engine promotion, such as using keywords that can easily lead potential clients to my site? If not, you may have to do a lot of promotion on your own.
Sources: James Clepak, owner, Enhanced Web Services; Rusty Jones, business development director, IVW Network

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