Younger Buyers and VUL: A Retirement Planning Duo
By Cary Lakenbach
The debate that President Bush has generated by proposing significant changes in the structure of Social Security should force Americans to think very carefully about retirement needs and consequently to prepare more proactively for retirement.
Great opportunities exist here for insurance companies, reps and agents, and clients. Clients of all demographic segments in the working population should examine their retirement needs.
Interestingly enough, particular advantages exist for insurers and producers specializing in younger age demographic segments. Younger individuals should expect to fund a greater percentage of their retirement on their own as opposed to relying Social Security or corporate retirement plans. That will impose a greater planning and funding burden on these workers, but the earlier they start such a program, the better served they will bebecause the compounding effect of investment gains is likely to be materially greater than if starting later.
Variable universal life insurance is an ideal product to explore for this purpose. Its fit is especially compelling. The remainder of this article explores the design and positioning of such contracts insofar as appeal to younger buyers is concerned.
A basic question to ask is: why life insurance? The answer is inherent in the product itself. Using life insurance as an accumulation and distribution vehicle certainly offers valuable design efficiencies (such as deferral of income recognition). Further, this insurance provides self-completing and guaranteed death benefit protection.
To a very significant degree, a sale to younger individuals can begin by estimating desired income amounts beginning at retirement. The assumption will need to include desired years of payout (as discussed later). The desired income amounts can be expressed as a percentage of the anticipated Social Security payout, which could be small or large, depending on market.
Young people increasingly want to save for retirement. Therefore, at the younger ages, lower premiums should be allowed.
Ordinarily, translating a desired retirement benefit to the required death benefit protection is based upon paying the highest level premium possible while still maintaining the favorable distribution treatment of non-MEC (modified endowment contract) life insurance.
One option to accommodate the needs of younger individuals is to pay a lower than maximum level of premium initially, allowing the premium to ramp up as the clients disposable income increases. (Rarely, if ever, should working people pay extra premium to build value within the insurance policy before they have made the maximum possible contribution to a 401(k).)
The impact of the savings component will be greatest at the highest possible premium level but would still be considerable at the initial lower premium levels. The key is that the potential for future long-term investment growth is greater the longer the funds are deployed.