Did you do a double take when you saw the title of this article? I ask because if, at your next networking event, you were to mention universal life insurance in the same breath as retirement planning, you may get a blank stare from some of your fellow agents or advisors. After all, the thought of retirement planning often conjures up the word “investments” – and of course, universal life insurance is not an investment, nor should it ever be referred to as one, despite the fact that the policies have a cash value component.
However, there are key reasons why universal life insurance merits a place in the discussion with certain clients during the retirement planning process. Universal life insurance may hold particular relevance to affluent baby boomers, ages 40-60, during retirement planning, due to the product’s attributes as a core protection asset as well as one that may provide tax advantages for the policyholder and – when combined with appropriate riders – needed income in retirement.
It’s no secret that baby boomers, even affluent ones, need help with retirement readiness. According to a report released by the Insured Retirement Institute (IRI), baby boomer confidence in their financial preparedness for retirement has dropped nine percent, from 44 percent in 2011 to 35 percent in 2014. When compared to 2013, only 35 percent of boomers are extremely or very confident that they are doing or did a good job preparing for retirement in 2014.
The role of UL
Let’s look closer at the role that universal life can serve in the context of retirement planning for affluent baby boomers. First, consider the unfortunate reality: not all clients survive until they reach their anticipated retirement age. Based on the 2008 Valuation Basic Table (VBT) Relative Risk mortality tables from the Society of Actuaries, on average, of 1,000 males who are age 45 and in the standard nonsmoking rate class, 923 would be alive at the end of 20 years. Also on average, among 1,000 insured females who are age 45 and in the preferred nonsmoking class, 942 would be alive at the end of two decades.
What about clients who don’t survive to retirement age? In that situation, the presence of a life insurance policy is intended to “self complete” the retirement planning process, in the sense that the policy may provide loved ones with that which the policyholder may have accumulated if he or she had lived longer. Beyond the base-level death benefit are the tax advantages that universal life insurance may offer. Any growth in cash value (although growth is not guaranteed) is tax deferred. For clients in the traditional retirement zone of age 65 to 85, a properly structured life insurance policy to augment personal savings plans also has the potential to serve a key role, providing income tax-free benefits through loans and withdrawals.
Keep in mind, of course, that a policy loan or withdrawal will reduce the death benefit and that cash taken from the policy that surpasses the total premiums paid may constitute taxable income upon lapse or surrender of the policy. Additionally, let clients know at the start of the planning process that, as always, they should seek independent tax or legal advice when considering their own circumstances.
UL and longevity risk
In addition to the tax advantages of universal life insurance and the potential for the product to self complete the planning process is the opportunity that it may provide to take the longevity risk off the table. When combined with a longevity rider (and when the policy premiums are paid), a universal life contract can provide clients who live to age 85 with an opportunity to access a stream of retirement income that may be income tax free. That income stream can serve a welcome role in an active retirement program.
What’s more, it’s possible today to provide clients with a guaranteed universal life insurance product that’s combined with both a longevity rider and a chronic illness accelerated benefit rider – a hybrid offering that is designed to provide solutions whether clients outlive their assets, become chronically ill or die too soon.