Recent surveys show that sales of indexed universal life insurance products are trending right now, and while client interest in using indexed universal life as a retirement income source is stronger than ever, heightened regulatory scrutiny is similarly on the rise. As a result, ensuring that this type of product is suitable for your particular client is critical to avoiding a potential headache down the road.
While some advisors may think that they know all they need to know about indexed universal life, today’s rapidly evolving market environment has created an enhanced need for advisors to not only know the ins and outs of the product features, but also whether an indexed universal life insurance product is the right fit for the individual client’s retirement planning needs.
Indexed Universal Life as Retirement Income
Indexed universal life insurance policies are cash value life insurance products that are tied to a specific stock index—such as the S&P 500—and provide returns based on a formula that is tied to market performance.
These policies often come with both an earnings cap and an earnings floor, so that, for example, the policy might earn no more than 10%, but no less than 2%, meaning that the policy can continue to grow even in an economic downturn.
Once the cash value has built up to a substantial level—over a period of years—the client can begin taking tax-free withdrawals to fund retirement, regardless of whether he has reached the age at which penalty-free withdrawals from a traditional retirement account become permissible. If the client dies prematurely, the policy, of course, still offers the traditional life insurance death benefit that will be paid out (also tax-free) to the policy beneficiaries.
As popular as indexed universal life insurance has become, the client must have the ability to maintain the policy over a relatively long term—at least 10 years—before reaping the benefits of the product as a retirement planning vehicle.
The cash value of the policy will grow as premiums are paid in, but it takes several years before the value of the policy will exceed the level of premiums actually paid.