With the evolution of products today, the number of choices agents have to offer their clients can become overwhelming. One of the newer products on the market is indexed universal life (IUL). Sales of IUL products continue to grow but are still a fraction of the overall life insurance sales made in today’s marketplace. In addition, many top carriers still do not offer IUL products. Also, many agents are still confused about the approach to take when presenting IUL products to their clients.
In this article we will discuss two very important aspects of the IUL that many clients will relate to and embrace: protection and income, or as our headline hints, PI.
People today in their 30s, 40s and 50s have many long-term concerns as they look into the horizon for their retirement. Some of these concerns include the following: Will Social Security be there? What will taxes look like in 20 years? Where will the American economy be in 20 years? How can I protect my family from financial hardships in the event of my early demise?
Talking about the above issues with clients is pertinent for every agent because that is what people are thinking about already and it allows the agent to present real solutions to the clients. One solution that helps to solve many of the issues people have is a properly structured IUL policy.
Let’s start with an example of an IUL product structured for a 42-year-old male in good health, along with the following assumptions: $300 a month deposit until age 60, a starting death benefit of $100,000, a preferred rating and an assumed rate of 8 percent return.
In this scenario, the individual will have supplemental death benefit coverage for his family at the start of the policy. This part of the conversation should be straightforward with the client because many Americans are severely underinsured or have no coverage when it comes to life insurance. In fact, according to an August 2010 LIMRA study, ownership of individual life policies is at a 50-year low.
Now, some may ask, why spend $3,600 a year just to provide a $100,000 death benefit? This individual could purchase a 30-year term for approximately $300 a year. And the question is answered by pointing out these three things: the death benefit protection is available for life, not just a specific period; there is a great additional benefit that this type of specialty life product provides—great cash value; and there is zero flexibility with the term product and the death benefit stays level.
The cash value of this type of product is one of the amazing features that is not discussed enough with clients. Very few financial products provide the benefits and flexibility of IUL policies. This one policy provides a death benefit for the client, provides tax-free loans for any reason (I challenge you to find another product that provides tax-free income for any reason!), allows for tax-deferred growth of cash within the policy, and many allow for special chronic illness or LTC riders to protect against long-term care stays. This addresses one portion of this product—protection. Now we will discuss the second part—income.
As stated above, many people have concerns about how the economy will look 20 or 30 years into the future. These concerns are easily addressed with an IUL product. The basic principle of any indexed product is that in negative years the person’s gains and principal never go down. So, any future drops in the market will be irrelevant to a person holding an indexed product. In addition, many IUL products have phenomenal caps that allow clients to capture much of the upside of the market.
Now back to the example: this same person retires at age 60. During his working years, he has used a variety of savings and investment vehicles to have sufficient income in retirement. He has stopped paying his IUL premiums and the death benefit is now $216,066. In addition, this individual has decided to start to draw a tax-free income from his IUL policy. For the next 20 years (ages 60 to 80), he can draw $8,116 per year. Assuming he was in the 25 percent federal tax bracket and lived in a state with a 5 percent state income tax, he would need $11,594 per year from a regular taxable account to match the same after-tax amount from the IUL. In addition, at the end of the 20 years of income, he still has a cash value of $42,662. He could continue to draw income, let the cash grow or take the cash out of the policy.
Also, I think a comparison to a fixed universal life policy should be examined. Using the same example and numbers provided above, this individual could start the universal life policy for $300 a month and a $100,000 original death benefit (the fixed interest rate is assumed at 5 percent). Starting at age 60, this individual could draw $3,293 per year compared to the $8,116 in the IUL policy. The IUL policy would give 146 percent more tax-free income each year. In addition, the death benefit at age 60 on the full policy would be $161,248 compared to $216,066 in the IUL policy—the IUL policy has a 34 percent increase.
As shown above, for a relatively small investment of $300 a month, an agent can provide real value to clients by providing them with tax-free death benefit protection and tax-free income during an uncertain economy as well as remove the volatility that many other investment vehicles have. This is just one example; if this same individual were to double his monthly premium of the product, the initial death benefit would be $168,414, with a death benefit of $449,380 at age 60. In addition, he could draw $16,986 per year from the policy for 20 years with an ending cash value of $88,221.
By starting a conversation about protection and income, many clients will see the value and affordability of IUL policies. You can provide a great service to clients as well as increase sales by incorporating these products and conversations into your regular practice.