There would have been virtually no need for Fixed Indexed Universal Life if it had existed in the 1760s, when life insurance was first introduced in North America. One of the major attractions of FIUL – the ability to accumulate cash for tax-efficient retirement income planning – would hardly have been necessary, inasmuch as the average life expectancy was 42 years.
Over the next century, life expectancy in the US rose by only five years to 47. Today, it is 78, but this figure is somewhat misleading. Men who reach the age of 65 can expect, on average, to live slightly past 80. Women who achieve the same milestone are prone to live nearly two more decades. In effect, men and women who retire at age 65 will likely need to produce income from their savings for another 15 and 19 years, respectively.
This is a justifiable source of concern for many Baby Boomers. The Benefit Research Institute’s 2011 Retirement Confidence Study indicated that more than half of Boomers are concerned about outliving their retirement savings. According to an April 2011 Associated Press poll, 89 percent of the 77 million American citizens born between 1946 and 1964 are not strongly convinced that they will be able to live in comfort in their later years.
Moreover, close to 44 percent of this major demographic expresses little or no faith that they will save sufficient money by retirement. One in four does not expect to ever retire.
These survey numbers may actually understate the retirement income challenge facing the Baby Boom generation, when we consider that:
- Virtually all agents and financial advisors have worked with clients who (a) underestimate what their expenses will be over the course of retirement, (b) fail to take into consideration the full impact of taxes and inflation, and/or (c) overestimate the income that their investments and Social Security will generate;
- Even though, according to research from the St. Louis Federal Reserve, the savings rate among US households has been rising since 2008, it is still only half of what it was in 1980;
- Total household debt remains unhealthily high at close to 114 percent of after-tax income, according to The Wall Street Journal; and The Federal Reserve’s latest triennial Survey of Consumer Finances (2009) shows that household wealth has declined since 2008 and that average retirement savings are barely in the six figures. Median retirement savings are considerably less.
For agents who are adept at using FIUL as a retirement income solution, the boomer generation’s need for a reliable, long-term income source represents a sizeable market opportunity. Nevertheless, guiding retirees and near-retirees through the process of adopting FIUL can be difficult, as many individuals in this age group are unpleasantly surprised when their financial situation is examined in detail. Regardless of whether an agent or FA has a close and trusted relationship with retirement-age individuals, it takes considerable tact to break the news that their savings may not provide the quality of life they expect. Apprising clients that they may conceivably run out of money requires an even more delicate discussion.
We should quickly note that these challenges are not confined to households at the lower end of the salary spectrum. It is not unusual in our industry to encounter solidly middle income boomers who have a home mortgage, equity loan or other outstanding debt. Indeed, slightly more than 50 percent of Americans who retire in their late fifties or early sixties continue to have a home mortgage, as do approximately 35 percent of those who retire later.
A 2007 study by the Urban Institute indicates that individuals in the middle income range commonly begin to see a progressive decline in their wealth near age 70. Given the average life span of US retirees today, this normal decline coupled with unanticipated outlays for emergencies or health-related interludes can abruptly compromise the longer-term income prospects of even “financially secure” households.
For a sizeable middle-income segment of the boomer demographic, FIUL can help to address these challenges.
FIUL’s Applicability to the Retirement Income Market
FIUL can be an attractive option for households that seek both a death benefit and the ability to augment retirement income. It offers:
- A death benefit that is income tax free
- The ability to use fixed-index crediting methods to accumulate cash value that can be converted to a tax-free retirement income stream
- Interest gains that can be enhanced by higher potential market results tied to indexed returns
- Protection from down markets, as all prior interest gains are locked in
- Income tax-deferred growth on interest gains
Among the three main universal life products – fixed, variable and fixed indexed – FIUL arguably delivers the most compelling mix of attributes for the majority of near-retirees and retirees. Fixed universal life is considered to have lower risk than FIUL and variable UL, as its interest crediting return is based upon the overall investment portfolio of the issuing insurance company. The trade-off is that the interest crediting return is expected to be relatively low, as most insurance companies populate the majority of their investment portfolio with relatively safe bonds.