IUL: One solution for two big problems

In today’s perfect storm of low interest rates, diminishing pension plans and doubts surrounding the future of Social Security, many Main Street Americans are faced with two competing financial priorities: gaps in life insurance coverage and gaps in retirement income.

The gap in life insurance coverage is significant. About 53 million Americans with household incomes between $50,000 and $250,000 do not have life insurance coverage1, and 40 percent of those who have coverage don’t think they have enough.2

The gap in retirement income is equally sobering. Baby boomers are aging en masse, and as they near or enter retirement, they must find a way to fund what could be two decades or more of life. According to data compiled by the Social Security Administration, a man reaching age 65 today can expect to live, on average, until age 83. A woman turning age 65 today can expect to live, on average, until age 85. About a quarter of 65 year olds today will live past age 90, and 1 in 10 will live past age 95.3

While Americans are living longer, fewer people have traditional sources of retirement income, such as pension plans, leaving many people to rely on themselves to fund their retirement. Compounding the problem is the prolonged low interest rate environment, which has cut into the returns of many traditional sources of retirement income, such as CDs and money market funds.

As a result, only 32 percent of Americans in their pre-retirement years think they have sufficient assets for retirement. And 76 percent of pre-retirees think they will have to work longer than expected because they won’t have enough money.4

That’s understandable given the balances in many people’s retirement accounts. The average 401(k) balance in U.S. plans administered by Fidelity at the end of 2012 was $77,300, according to a Fidelity study.5 For workers aged 55 and over, the average balance is $143,300.

So it’s little wonder that many retirees and near retirees feel unprepared. They have no — or not enough — life insurance and too little in savings to fund their retirements.

An indexed universal life insurance (IUL) policy may be able to help meet both priorities.

Protection, income and growth in one product

In essence, indexed UL is universal life insurance that has a different way of crediting interest to the policy. Interest is credited to the policy based on the performance of an index, most often the S&P 500, with both upside opportunity and downside protection. Most IUL policies also have a fixed account that credits interest to the policy as set or declared by the insurance company.

Indexed UL combines death benefit protection with tax-deferred cash accumulation potential, a combination of insurance features that makes it very appealing to customers. Your clients can benefit from the growth potential linked to stock market performance without the downside risk associated with variable universal life insurance.

It is important to understand that the interest growth potential is limited by a cap rate and/or a participation rate set by the life insurance company. Unlike variable universal life insurance, which has no downside protection, even if the index’s percentage change is negative, there is a minimum crediting rate, which is often zero percent. A client’s policy value is not reduced based solely on negative index performance. Of course, the policy’s charges and fees reduce policy value.

During qualitative and quantitative research6 among insurance agents and agency staff that we conducted recently, financial professionals said they are excited about IUL products because of three major advantages —

  • Financial flexibility,
  • Growth potential and downside protection, and
  • Income tax advantages.

Financial professionals said they appreciate IUL’s ability to provide their clients with a death benefit while building policy value that can generate tax-free supplemental income later in life.This income can be used for anything, including funding college tuition or paying for retirement and medical expenses. And the death benefit is there to help fund the client’s goals in the event of death, including executive buy-sell agreements.

Some IUL products even offer a third benefit — riders, available at an additional cost, that allow the consumer to access their death benefit to pay for covered long-term care expenses.

For a fictitious example of how IUL works, let’s say we have a client named David. David is 40 years old, in good health, married with two kids and makes $150,000 per year.

He needs additional life insurance coverage and also needs to save more for retirement. As much as he’d like to take advantage of upside potential in the market, he’s concerned about the downside risk.

He also wants the flexibility to access his money prior to age 59½ without federal tax penalties. He has set aside $500 per month to achieve his goals.

An IUL insurance policy could help David with both priorities. He could use his $500 per month to pay premiums for an IUL policy that would provide an income tax-free death benefit, allow his policy value to grow tax-deferred and have index-linked interest credited to the policy. Finally, David has the ability, in most circumstances, to access his policy value on an income tax-free basis during retirement — or at other times.

IUL’s surging popularity

The flexibility of IUL products, which offer multiple and meaningful benefits in a single product, are responsible for a surge in IUL sales. According to the LIMRA Q4 2012 survey, IUL has grown from a $330 million market in 2006 to a $1.5 billion market in 2012.7 Index UL sales soared 42 percent in Q4 and improved 36 percent for the year.9 IUL now represents 30 percent of total UL premiums and 12 percent of all individual life insurance premiums.10

It’s important to understand any indexed UL policy and evaluate its performance over time to make sure it’s on target to meet your client’s goals. Annual policy reviews are important. You should work with your clients to adjust their premiums, withdrawals, death benefits and index interest-crediting strategies as conditions change.

Helping people understand the options is a differentiator for producers, who need to be seen in the role of trusted advisor. While more difficult than ever before, planning for a successful retirement is achievable. Producers who employ strategies designed for today’s retirement challenges will be in the best position to help clients weather the retirement storm.

 

For more on universal life, see:

Keeping universal life products attractive

Indexed GUL: The all-purpose solution

Market update: Universal life insurance

 

The tax information in this material was written to support the promotion and marketing of the contract. The Genworth Financial companies and their representatives and distributors do not provide tax or legal advice.

The guarantees associated with a life insurance policy are based on the claims paying ability of the issuing insurance company.

 

Footnotes:

  1. Genworth LifeJacket Study, 2012
  2. Genworth 2011 LifeJacket Study, September 2011
  3. Social Security Administration, Life Expectancy Calculator, April 2013
  4. Genworth Retirement Income consumer study, August 2012
  5. Fidelity Investments, Quarterly Analysis of 401(k) Plans, February 2013
  6.  Genworth IUL Research, 2011-2012
  7.  LIMRA, U.S. Individual Life Insurance sales, Fourth quarter 2012
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