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 upon 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 percent, but no less than two percent, meaning that the policy can continue to grow even in an economic downturn.
See also: The value of cash value life insurance
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.
In three separate instances, a community spouse had purchased a Medicaid compliant annuity so that his spouse, a nursing home resident, could qualify for Medicaid. Because several counties in Ohio had decided to treat Medicaid compliant annuities as impermissible asset transfers even if those annuities satisfied the strict federally mandated criteria, the Medicaid applications were denied.