Filed Under:Health Insurance, Ltci

IUL: The comeback kid

Indexed. The word carries weight with senior advisors today. Indexed annuities have provided advisors with a way to protect their clients' money while giving that money the chance to grow if the market goes up. And seniors have responded. Sales grew during the past five or six years. (They dropped by 11 percent in the first quarter of this year, but assets in indexed annuities still grew). Some advisors have come to specialize in the indexed annuity products. Fixed indexed annuities are a good fit for many seniors in many situations.

Another product with ties to the same indices that make indexed annuities work is indexed universal life insurance. IUL, which has been on the market for little more than a decade, saw its star wane shortly after its inception due to the explosion of variable products that sought to take advantage of the rising interest rate environment of the late 1990s. But once the bubble burst, VUL lost a bit of its luster and IUL has been on the rise ever since. Last year, IUL sales hit $350 million, and that number is expected to rise further this year.

"What we've seen in the low interest rate environment is that people want downside protection," says Doug Israel, the senior vice president of product development for AIG American General ( www.aigag.com ). "IUL sales have really spiked. In 2006, indexed sales almost doubled."

Scott Fryklund, senior vice president and national sales manager for life insurance at Minneapolis-based Allianz Life Insurance Co. of North America ( www.allianzlife.com ), has a similar story. "Most companies coming in see it as a growth opportunity," he says. "Our sales are up 50 percent over last year's, primarily due to IUL."

John Scheer, the regional vice president of AMZ Financial Services ( www.amzwebcenter.com ) in Waukee, Iowa, says AMZ's compound annual sales growth rate has been 30 percent over the last five years. He says many industry experts believe sales may top $1 billion by 2010 or 2011. Advantage Compendium estimates first-quarter index life sales were more than $103 million, a 31 percent increase over the first quarter of 2006, putting IUL on pace for more than $400 million in sales for 2007.

Growth like that is sure to catch more advisors' eyes, which can only fuel further growth. But the folks at the life insurance carriers, the people who work with and design these products, want advisors to understand a couple of things and be able to pass the knowledge on to consumers. Fryklund says that IUL is built on a universal life chassis, which makes it a general account product. That brings up two points advisors should remember. One, the products are backed by the size and strength of the issuing carrier, whereas a product like variable life is backed by outside performance. Which leads to the second point: Even if the index the product is linked to goes through the roof, there is still a chance the consumer can be left out in the cold, because, as stated in the first point, the product is backed by the insurance company. If the company manages to falter while the market does well, IUL products can fail to pay what they promised.

"Don't say to prospects, ?You're going to get returns in the stock market.' This is backed by the assets of the company," Israel says. "It's a general account sale. If the company can't back it, the index means nothing."

And unlike variable products, where the death benefit means less than the accumulation potential to many consumers, IUL is a death benefit-based product.

Good candidates

"There has got to be a life insurance need," Israel says, responding to a question about who IUL is a good fit for.

Whether it's for the death benefit or estate planning or supplemental retirement income or the new and improved living benefit options, he firmly believes the need for life insurance must exist. If a senior still wants to take a little risk with some of his money, Israel says, that person can be put into a true investment vehicle or a variable product.

Another thing that has to be present in a consumer for IUL to work appropriately is a long-term commitment. Any client or prospect has to understand that IUL works best when the money in it is left alone for the long haul.

"I like index life better than an index annuity because life insurance is longer term," Fryklund says. "You give up some of the top-end growth potential vs. a variable product [but most seniors aren't looking for that anyway]."

"These products need 10 to 12 years to get over the hump," says Jason Konopik, AMZ's CFO. He explains that's because insurance companies tend to invest life insurance premiums over a longer time horizon than they invest annuity premium, for example. This allows IUL to carry higher cap rates, but it also means people need to remain in the product longer, but with retirement lasting as long as it does anymore, thinking long-term isn't a bad idea. "I've rarely seen a case where an IUL product couldn't beat an [indexed annuity] over the long term."

Israel agrees. He sees someone who has a 15-year horizon and who doesn't need the money now as being an excellent candidate for IUL.

"This is not a product for someone who says, ?I need all my money in four years.' It's appropriate for long-term accumulation and slow withdrawal, as a supplement to retirement income," he says

So clients in their mid- to late-50s - and even people in their early to mid-60s - are solid candidates, if they are still in good health.

"The great thing about prospects in their mid- to late-50s," Israel says, "is that they have money. And with index life, you tend to overfund."

One more great thing about consumers as they get older is they have an inclination toward safety. Senior advisors know that as well as anybody; they talk about it with clients every day. IUL is like an indexed annuity in that regard.

"The primary advantage of IUL is that customers get the opportunity to participate in the gains of the market [up to a point] without the risk of downside," Fryklund says. Again, the strength of the carrier comes into play here.

Konopik sees a couple specific situations where IUL is a good fit. Someone who is looking for an accumulation vehicle and a death benefit may be interested in IUL. If the person owns term life insurance and an annuity, he likely would be interested in IUL because it can accomplish both purposes. Also, someone who is interested in wealth transfer may want to hear more about IUL.

"If a client has amassed a lot of money in CDs and annuities," Konopik says, "and he is looking for a way to get that money into other products tax efficiently, [IUL may be the answer]. Take, for example, a client with $200,000 in a deferred annuity. It's simple to annuitize it and use the payments to fund a life insurance vehicle."

Advisors who work with senior clients are going to find other situations where IUL is appropriate, and that can only help the growing number of retirees and the coming wave. And carriers are not blind to the fact that retirement is changing, as are the demands of consumers who are busy thinking about their retirement and taking care of the families after they are gone. Much as the World Wide Web is undergoing a makeover - Web 2.0, as it is being called - the second generation of IUL products is coming.

Improvement

From a consumer standpoint (and an advisor standpoint, for that matter), the second generation of IUL products is good news for a couple of reasons: more players in the marketplace, and added and improved features and benefits.

More players means more products and more competitive rates. Konopik says pricing is more aggressive due to the increased number of carriers in the space, a number Advantage Compendium pegged at 24 for the first quarter of 2007, double the number Advantage Compendium found in the fourth quarter of 2000. AMZ's Scheer says that total is expected to rise. When companies have to compete with each other, consumers usually win. In this case, that means a less expensive product that can meet many of the demands of retirement planning and beyond.

To meet the demands of retirement planning and beyond, IUL features and benefits are getting better, which is something advisors can tout as they present the products. The improvements include living benefits, enhanced income options, higher rate caps, added index strategies and more.

The income options will appeal to seniors who plan to use the IUL policy to supplement retirement income down the road, but the living benefits are bound to catch many seniors' attention. As AIG's Israel said before, this is a life insurance product, so the need for a death benefit should exist, but as the products improve it gives seniors additional peace of mind to know there are options in case of emergency.

"Living benefits are a huge part of it for many people," Fryklund says.

Terminal illness riders offer up to 100 percent of the death benefit if the policyholder is given from six months to a year to live, depending on the company and the policy. Some companies, Allianz among them, offer a long term care component to their contracts. Clients often have to qualify for an LTC rider, but the requirements often are less stringent than when qualifying for a straight LTCI policy. Fryklund says someone who qualified for the rider and becomes incapable of performing two of six activities of daily living can collect the death benefit for care and stay in the home.

Konopik says living benefits allow policyholders to borrow from the policy to pay for long term care or to pay for things like college for a child or grandchild. He says the second-generation of IUL is "more of a lifecycle product. It meets all the needs of a lifetime."

Considering lifetimes stretch far into retirement, something that hasn't always been the case, a product that can adapt and meet those lifetime needs is a welcome addition to many portfolios, but not all. Even the folks who create and package IUL admit it isn't for everyone. It is, however, the right product for many, as witnessed by its continued growth. Advisors who recognize the people IUL works for and the situations it works in will be poised to help clients with the latest index-linked product - a relatively safe product. A product realizing it has a home in the right circumstances.

"This is definitely a product finding a market, especially as the marketplace is getting older," Fryklund says.

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