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March 27, 2017 at 11:30 AM
As a financial professional, you’re likely well aware of the role and value proposition of permanent life insurance.
Yet, the most recent LIMRA Ownership Study report, published earlier this year, shared that 2016 marked the first study period when owners of individual life insurance policies were more likely to have term life products than permanent life products. Perhaps consumers simply don’t know how permanent life insurance, and universal life products in particular, can support their retirement planning and protection goals.
Related: Time to revisit cash value life insurance
Many people may not be aware that a permanent life insurance policy may help them address a critical challenge their retirement portfolio could face: the sequencing (or order) of returns. They may also not be aware that in some situations, owning two types of permanent life insurance policies — one designed for accumulation and the other designed for protection — may be better than having only one. Let’s review.
Addressing the sequencing of returns
According to a hit song from the late ’60s, “What goes up must come down.” Actually, what comes down often goes up again, from gasoline prices to the stock market. However, negative returns in a retirement portfolio during the first few years that it’s in the distribution phase can heighten the potential for financial disaster.
Related: 10 things to know about whole life insurance
The sequence of returns, along with fixed withdrawals, may reduce retirement capital and result in clients outliving their savings or needing to lower their standards of living to stretch their funds. An index universal life (IUL) insurance product with sophisticated volatility control features may serve as a smart solution.
Consider the two scenarios below. Keep in mind that these are hypothetical examples, for illustrative purposes only. They are not actual cases and are intended solely to depict how the sequencing of returns in a retirement portfolio might work.
Not an actual case, and is a hypothetical representation for illustrative purposes only. The annual values presented above are based on the values of the S&P 500 without dividends at the end of that year. (Source: AIG)
Scenario A
Let’s assume you have a client, Mary, who has accumulated a retirement portfolio of $1,000,000 at her retirement age of 65. She plans to invest this amount in an index fund that mirrors the S&P 500®. Mary’s goal with this asset is to withdraw $50,000 per year, pre-tax, to help support her post-retirement lifestyle. If she retired and experienced the sequence of returns in Scenario A, her projected account value after 10 years would be $506,951.
The Situation
Clients can’t control what the market will do after they retire. However, it’s possible to offer clients modern IUL insurance that is designed to dynamically blend equity and fixed income indices to help stabilize returns and hedge against the risk of negative performance by the S&P 500.
If Mary purchased, at age 50, this type of IUL insurance solution, built for volatility control as well as robust accumulation, her goal would be to fund the policy and use the attributes of IUL — upside potential with no downside risk due to market performance — to amass additional cash value inside the contract.
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She then could use the accumulated cash value in the IUL policy as a backup income source for the years following negative performance in her retirement account. Furthermore, her IUL policy could help her with diversification, both from an asset allocation standpoint as well as from a tax perspective (based on current tax law). Be sure to tell clients to consult a qualified tax advisor when considering their own situation.
Related: The top 10 IUL myths and how to debunk them
Two plans vs. one
For a client who has different goals than Mary — for example, one who would like the potential for a supplemental income stream in retirement, but also is focused on long-term guarantees – leveraging an IUL solution together with a guaranteed universal life (GUL) insurance product may be beneficial. Take a look at the following hypothetical example that demonstrates how index interest is calculated. As with the foregoing examples, this one is for illustrative purposes only. It doesn’t reflect current interest crediting rates, cap rates or participation rates, nor the return of any investment. It’s also not a guarantee of future income.
Grant is a 45-year-old pediatrician who is married with three kids. He needs $500,000 of additional life insurance coverage. His investments suffered in the recent recession, and he wants to ensure his family’s protection. He appreciates the long-term guarantees of a GUL insurance policy.
For clients who want the most out of their insurance program, but are concerned about guaranteeing their protection for their families, you may find that an IUL policy plus a GUL policy adds up to one optimal solution. (Photo: iStock)