More Americans than ever before need help from a financial professional to learn the ins and outs of today’s life insurance options, yet fewer consumers are actually purchasing new life insurance policies. According to LIMRA’s 2010 Life Insurance Ownership Study, 30 percent of U.S. households have no life insurance protection at all. In addition, only 44 percent of households have individual life insurance – a 50-year low. The reason for this drop in sales? More than 40 percent of Americans say the reason they don’t have more life insurance is because of other financial priorities, like saving for retirement.
Although not new, fixed index universal life insurance (FIUL) can help address those concerns. The provision of the death benefit along with other powerful benefits, including living advantages and optional features and riders, can make FIUL a compelling option in the evolving life insurance marketplace.
FIUL on the rise
According to LIMRA, life insurance policy ownership has continued to decrease over the past two decades. Why the decline? A combination of economic, consumer, distribution and industry trends have pushed people away from traditional term and whole life policies toward products that, in addition to the death benefit, provide some type of cash-value accumulation potential.
In this context, it’s easy to understand why sales of FIUL policies have been on the rise since 2002. Falling in the middle of the spectrum, FIUL combines death benefit protection with guarantees — backed by the financial strength and claims-paying ability of the issuing company — and the opportunity to earn indexed interest. This is an attractive combination in today’s changing economy.
As the primary purpose for life insurance, the death benefit can provide some financial reassurance to beneficiaries. Death benefit proceeds can be used for various purposes, such as: estate taxes, final expenses, paying off outstanding debt, funding a college education or providing replacement income. This death benefit is important, as nearly 70 percent of American households with children under the age of 18 would be in financial jeopardy if their primary bread winner died.
People are also looking for alternative ways to protect their loved ones and their financial future. Thus, FIUL combines a death benefit protection with the opportunity to accumulate cash value based on positive changes in an external index that will not decrease due to market volatility.
Why offer FIUL?
Adding FIUL to your product offerings is beneficial for various reasons. As previously mentioned, the economy is shifting. New tax laws are creating new sales opportunities, specifically if your clients prefer to pay their taxes now versus paying them later. Tax rates from 2010 have been extended through 2012 under the Tax Relief Act, making saving for the future a more effective process.
FIUL can be an effective solution for clients that want to take advantage of this situation. This product offers the opportunity to access any potential cash value accumulation income-tax-free through various policy loans for various purposes, such as supplemental retirement income, supplemental college funding, emergencies and/or business planning. Even better, some newer FIUL policies provide new loan options, including standard, preferred and participating loans rather than variable rate loans, which can be more volatile because of month-to-month fluctuation.
The goal for many carriers is to offer loans that will not fluctuate from year to year, providing predictability of your client’s loan amount. Remember, however, that when discussing policy loan options with clients, it’s important to communicate that policy loans will reduce available cash values and death benefits, and may cause the policy to lapse.
The right FIUL for your clients
Another important factor your clients should consider when purchasing life insurance is where the policy comes from, because all life insurance policies are not created equal.
Does the insurer have a long history? Is it fiscally responsible? Does it have a good reputation for stability and reliability? And perhaps most important, does it do anything unique that helps it stand out from among the crowd?
A good answer to that question can be found by exploring which companies utilize a conservative investment management approach that is designed to weather all market conditions and therefore help keep their policies protected. This can mean using strategies like diversification across high-quality, fixed income asset types, efficient asset-liability matching and strong risk modeling, a high-level of liquidity and in-house hedging.
What’s hedging, and why does it matter? It’s a way of making strategic investments intended to reduce the impact of market downturns. No one can predict the future, so it’s important to be able to withstand changes in the market. To deal with these fluctuations, most insurance companies rely on banks for static hedging, which is generally set up and then left in place for a specific period of time without being rebalanced or adjusted. Since banks charge for this service, this adds cost for the insurance company, which ultimately gets passed on to the customer.
Other insurance companies can have more flexibility through employing in-house dynamic hedging. Dynamic hedging allows for more frequent adjustments as stock prices change — and generally, the more frequently a hedge is adjusted, the better it can perform. This is a significant competitive advantage because it can help the insurer manage risk in real time by rebalancing multiple times per day. This allows the company to reduce expenses, design more innovative products and features, and purchase higher-grade bonds. It can benefit the end customer because the insurer can pass on some of the savings to policy holders in the form of higher caps and participation rates.
Present and future protection
If you haven’t fully considered FIUL in the past, now may be the time to give it a second look. Exciting advancements with FIUL are designed to give your clients an effective way to safeguard their family, providing protection for their life and for the future.
Jason Wellman is the senior vice president of life insurance sales for Allianz Life. He can be reached at [email protected].
For more exclusive life insurance coverage visit ASJ’s Life Insurance Resource Center.
Past life insurance stories from ASJ: