December 23, 2013

Now Entering the Retirement Income Game: Universal Life

A new product feature has emerged to help clients looking to supplement retirement income or protect against the risk of outliving their assets, and, in an unusual twist, this feature is not attached to an annuity. Insurance carriers have thrown universal life insurance policies into the retirement income game by offering accelerated benefit riders that make it easier than ever for clients to access the value of their policies.

For clients looking to secure life insurance protection, longevity insurance, and a steady stream of retirement income, these new guaranteed income withdrawal riders could be the perfect solution—providing all three benefits in a single package designed to achieve your client’s specific goals.

Living Benefits and Life Insurance

While the name may vary based on the insurance company issuing the contract, these new riders provide a benefit—variously coined guaranteed withdrawals, lifetime income or lifestyle income—that is essentially a form of accelerated benefit that can be accessed by the client after a set waiting period has expired. Unlike the accelerated benefit riders that have historically been offered, these benefits are not tied to a client’s chronic illness or need for long-term care, so that the withdrawals are easier than ever to obtain.

Once the waiting period has elapsed, the client can either elect to begin receiving income payments or to extend that waiting period into the future. The client is also permitted to adjust the actual monthly benefit (within a preset range) to most appropriately suit his needs at the time. Once income payments begin, they continue for a predetermined length of time, which may range from five to 20 or more years.

The income payments are made from the policy death benefits and, accordingly, reduce those benefits as they are paid out. However, a client may choose to stop income payments at any time after they have begun—and may even restart those payments if his circumstances change—allowing the client to adjust to protect against longevity risk or simply to ensure sufficient income to maintain his lifestyle.

Unlike an annuity product, these income riders are typically designed so that the policy beneficiaries will receive a death benefit even if the client outlives the income payment period.

Risk Factors

While there is a risk that the client will not outlive the waiting period—typically a period of about 15 years—because the life insurance portion of the contract is reduced only by any income withdrawals actually taken, the full amount of the policy death proceeds would still be paid out to the client’s beneficiaries.

However, your clients should be aware that, as a risk management technique, the insurance carrier may actually charge a higher premium for these income riders if the client is relatively young and healthy because of the likelihood that a healthy client will withdraw a greater portion of the income benefit. This, combined with the fact that the rider is one that can be attached to a life insurance policy that your client already owns, might tend to make these riders more attractive to older clients—those who have already retired or plan to do so in the near future.

Because these riders are combined with traditional life insurance coverage—and may also be combined with riders that provide protection in the event of illness or institutionalization—they round out a completed package of customized protection for your clients. By allowing the client to adjust income flow based on actual needs, the rider can provide certainty and security throughout your client’s retirement.

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