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Boomer Strategy: Use VUL For Income Plans

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With the economy starting to rebound, income planners are beginning to look once again at variable universal life and how it can fit into the retirement income plans of baby boomers.

Actually, financial advisors are looking at virtually all cash value-building life policies in this light. But this article concentrates mostly on use of VUL products for this purpose.

In the first quarter of 2004, annualized premium for VUL was down 8% when compared to the first quarter of last year, allows Elaine Tumicki, corporate vice president and head of product research at LIMRA International, Windsor, Conn. However, “half of the top 20 variable life companies reported increases in the first quarter,” she says, “and nearly all were double-digit increases. This compares to only one of the top 20 VUL companies that reported an increase in 2003.”

When choosing VUL or universal life or other cash value products, boomer clients typically want more than a death benefit, says Michael T. Palermo, an attorney and financial planner based in Lexington, Ky. “They want a policy that builds economic benefit inside for possible use later onto supplement their income.”

If the client is only interested in having an investment, this would not be a good choice for the income plan, he says. “In general terms, you dont encourage the client to buy life insurance unless the clients needs the life insurance protection, tooRemember, the client pays for the insurance.”

But if the boomer has the insurance need, he adds, “the advisor can show the client ways to work VUL into the income plan as well as the estate plan.”

Many people who are age 40-55 and earning salaries of $100,000 or more are now working with financial advisors on their retirement plans, points out Leonard Scholl, assistant vice president-individual and small business markets at Sun Life, Wellesley Hills, Mass. Sooner or later, he says, “the question comes up: Why not factor into the retirement income plan a means of obtaining supplemental income?”

If the client is interested, the focus then turns to finding out what to put aside for this purpose and how. Funding a VUL policy is a solution that often works, Scholl says. And, with the economy improving, this is an especially good time to consider that. “You want to get into [the policy subaccounts] before the stock market goes back up to its high.”

The VUL selection will be affected by the comfort level of the person, he says. If a client is not comfortable with equities, the advisor always can suggest using a fixed life policy, such as UL, for the supplemental income purpose, he says.

What is important to many boomers, Scholl says, is to address the fear many have that their funds will not last for their entire retirement.

To this point, he says, the advisor can show how the VUL offers a solution, through its exposure to equities. (Investing in equities increases the chance that the asset value will keep up with inflation and last longer than if invested in fixed instruments, most experts agree.)

Many VUL providers are looking at ways to make their products even more useful in the income planning market, adds Jerry Patterson, vice president and chief marketing officer-life and health for Principal Financial, Des Moines, Iowa. For example, he says, several are looking at innovations that provide no-lapse guarantees and types of income guarantees similar to those found in variable annuities.

Meanwhile, many producers are working with current VUL contracts in income scenarios. If the boomer has a need for life insurance, notes Kyle B. Walker, a financial services professional with New York Life in Overland Park, Kan., “I point how permanent life insurance can be used to pay a death benefit and a living benefit on a highly tax-favored basis under current tax law.”

That discussion includes showing how the client can take money from the policys accumulation value in the future.

If the VUL is not a modified endowment contract, says Melvin Feinberg, senior vice president at New York Lifes Westchester, N.Y., office, one recommendation would be to take withdrawals from account value up to basis and then policy loans thereafter. Under current laws, this can be done in non-MECs without paying taxes, he says.

A lot of people are not aware that this can be done, says Walker. Many boomer clients have stockbrokers and attorneys, he says, but those professionals usually dont mention it.

Once clients learn how they can use VUL or any permanent contract for retirement income planning, Walker often hears these reactions: “I didnt know you could do that; or Its almost too good to be true; or Life insurance is one of the wonders of the world.”

What impresses clients are the facts that the death benefit, the living or income benefits, and the tax-favored treatment are all in one contract, he says. To underscore that message, he says he sometimes relays to clients a teaching from his father: “Its not how much money you make, its how much you keep.”

Some strategies to consider in working with VUL in income planning:

–As boomers move closer to retirement, they should start moving more funds into less risky areas of the VUL and the fixed account, too, advises Feinberg. The agent should share the illustration with the client and use asset allocation materials to determine how and when to make these moves and to what extent, he adds.

–If taking withdrawals and loans from the VUL for income purposes, the advisor should work with the client to manage the policy to ensure the VUL has enough cash remaining so it will not collapse, says Feinberg. The agent can use the solve for function in illustration software to ensure a certain amount of cash remains, he adds. (Patterson, of Principal, points out that VUL innovations are on the way that will address this issue more directly.)

–The VUL can work well with boomer-aged spouses who are doing pension maximization, says Palermo. For example, one spouse could take his or her pensions maximum payout amount (the single life option) instead of the lower paying joint-and-survivor option. Then, take some of that payout to buy a VUL that provides death benefits in the event of the pensioners death. This works especially well when the wife is the plan participant and buys life insurance on herself, says Palermo, “because other things being equal she will pay less for the coverage than her husband.” However, he cautions, “the devil is in the details. The advisor should run the numbers to determine what is best.”

–”You cant fill the life insurance bucket in just 3 years,” cautions Walker. For the income plan to work, there needs to be a longer term accumulation period, of 16 to 20 years, he says. So, when using VUL in income planning scenarios, work with younger boomers in their 40s, he says.

–If the boomer is in his or her late 50s, the accumulation period will be shorter, so Walker says he may suggest a lifetime immediate annuity instead of a VUL. “Id use funds the boomer already has accumulated for this.” Feinberg, the New York Life executive, recommends considering the newer versions of single premium immediate annuities for this purpose, because they have many innovative features clients want.

–VULs used for income planning need to be properly funded, says Scholl. The funding levels should be such that the policy is “self-completing for the death benefit and disability needs and also for having assets for an income stream.”

Many experts say not all advisors are aware of how VUL can be used in income planning, so Scholl thinks the industry should take steps to increase awareness. Sun Life is doing this now. It has rolled out a “Supplemental Retirement Income Planning Tool Kit,” complete with fact finder, for use with the firms Futurity SM Accumulator II VUL. Advisors and clients can use the kit to design the VUL to supplement retirement income, he says.

Principal also has just debuted an education program. Called From Here to Security, it features education booklets and CD-ROMs the advisor can use to educate clients on how to move into the income management stage of their lives, says Patterson. Demand from the field prompted the development, he says, and now agents are “ordering it like crazy.”

Reproduced from National Underwriter Edition, July 22, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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