Within the past five years, the fixed index universal life insurance (FIUL) market has experienced positive annual growth, evidence that the product category is helping to meet consumer demand for those seeking both death benefit protection and the opportunity for their policy to build cash value accumulation from indexed interest.
Many consumers are attracted to the innovations available through FIUL products that can help them both protect their family in the event of an unexpected death — helping to meet a variety of financial needs, including income replacement for beneficiaries, mortgage responsibilities, estate tax coverage, final expenses, and more — while also providing options that can help them supplement their preparation for future financial challenges such as funding college, supplementing retirement income and dealing with rising costs.
In that way, FIUL can be an effective method for people to address multiple financial concerns at the same time. True to that theme, it’s important to be aware that the FIUL market has another unique option for consumers seeking life insurance protection on the lives of more than one person with a single policy.
Enter survivorship FIUL: a powerful combination of survivorship life insurance, also referred to as second-to-die life insurance, and the accumulation potential of FIUL. With a survivorship FIUL policy, clients can get death benefit protection for two lives. With the indexing and fixed index allocation options of FIUL, they can also benefit from the cash value accumulation potential that can make FIUL products so compelling.
With a death benefit that is generally income-tax-free to beneficiaries after the second insured’s death and the ability to build tax-deferred cash value accumulation, a survivorship FIUL policy can help your clients meet a variety of financial needs, both expected and unanticipated.
FIUL Benefits and Innovations
Before we dive into the benefits of survivorship FIUL, let’s look at traditional benefits of FIUL and recent innovations within these products.
FIUL differs from traditional universal life insurance by providing the opportunity for the policy to build cash value accumulation from fixed and indexed interest. FIUL lets the policy’s cash value increase based on positive changes in an external market index, but the policy’s cash value will never decrease when the external market index is negative (although fees and expenses will apply that reduce cash value).
Although an external market index may affect the indexed interest credited, the policy does not directly participate in equity or fixed income investments — clients are not buying shares in an index. Along with death benefit protection, we believe the potential for an increase to the policy’s cash value has helped make FIUL one of the fastest growing segments in the life insurance industry.
One of the most recent innovations that FIUL carriers have added are innovative choices in index allocation options. These index allocation options provide clients with more opportunities for cash value accumulation. In addition to the death benefit that can help clients protect their family or estate in the case of premature death, these index allocation options are designed to help accumulate cash value for various purposes, such as supplementing retirement income through policy loans and withdrawals.
Remember that taking policy loans and withdrawals against a life insurance policy will decrease the available cash value and death benefit and can cause the policy to lapse. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis (premiums paid) will be subject to ordinary income tax.
In addition to current fixed and index allocation options that can help build the cash value of the life insurance policy, a variety of crediting methods that may be available in combination with index allocation options can also offer the potential for a stated rate of indexed interest that is credited if the index performance is flat or experiences any increase from one policy anniversary to the next (including when the indexed interest exceeds that set amount).
For example, one crediting method, annual point-to-point, provides a straightforward approach that can help build cash value from only two points in time. This crediting method can be an attractive feature because even in a low interest rate environment, small index changes can mean indexed interest is still credited to the policy.
Financial professionals should also be aware of optional riders (available at an additional cost) that may be available on some FIUL products. FIUL policies may offer riders that can help protect the purchasing power of the loan amounts and can also address concerns about future tax increases. All guarantees in the policies are backed by the financial strength and claims-paying ability of the issuing company.
Added Flexibility through Survivorship
So why consider a survivorship FIUL policy as a potential solution for your clients? It all depends on their financial situation, but for individuals who need to protect two lives, a survivorship policy can be an effective solution.
First and foremost, because the mortality risk is based on two insured, it can be more cost-effective than purchasing two individual policies. The death benefit proceeds paid to beneficiaries are also generally income-tax-free. If structured properly, utilizing survivorship FIUL can be an effective estate planning too that can help cover potential estate tax liability for beneficiaries.
Although the death benefit comes after the passing of the second person insured, it may come at the time when financial proceeds are likely to be most needed. Also, clients may have the option to add a death benefit that would be paid after the first insured dies through an optional rider generally available at an additional cost.
These options can be very comforting for clients, providing them with the knowledge that their loved ones will be able to meet a variety of financial needs, including income replacement for beneficiaries, supplemental college funding, mortgage responsibilities, estate tax coverage and final expenses.