Diversification is an important concept within the world of financial planning, and rightly so. It rarely makes sense to put all of your eggs in one basket, and one could argue following that advice is even more important when it comes to working with hard earned retirement funds.
This idea is well known within investing and in recent years has extended to fixed index annuities, as carriers now provide clients with a wide variety of options for both index allocation and crediting methods within available contracts. It’s logical, then, that this strategy should extend to cash-value life insurance (specifically fixed index universal life insurance), where clients also have the opportunity to allocate the cash value within the policy to an index allocation and a crediting method that determines how much interest they may receive in a given year.
Many clients will naturally be attracted to the option that provides the most potential for earning interest, but it’s important to remember that might not be appropriate for that person based on their specific financial situation. The option with the highest interest potential will likely include less consistency and more volatility, meaning more potential risk of earning 0% interest for the client.
So how can financial professionals be effective in communicating which options might be an appropriate fit for their client? Making allocation choices is actually a lot like setting a lineup in baseball – a timely analogy since the baseball season is in full swing.
Understanding Your Options
A baseball team is usually comprised of a variety of hitters. The typical player is expected to hit singles and doubles, and may occasionally hit a home run. And although the home run hitters are more likely to hit the ball out of the park, they generally may also have a higher probability of striking out.
The same can be said about the different allocation options within a fixed index universal life (FIUL) insurance policy. An allocation option is a combination of an external index and a crediting method that determines how much interest the client can receive in a given year. Some allocation options may offer the potential for more interest – in this case, a home run – but may provide less consistency and more volatility. Others may have a lower interest potential – the singles and doubles hitters – but may provide more stability.
Because it’s impossible to predict the environment and which allocation option will be the home run hitter at any given time, it’s important to focus on consistency and getting on base. Diversifying allocation options can provide your client with more opportunities to make that happen.
There are various crediting methods to consider when discussing allocation options that may be suitable for a client’s situation. Crediting methods relative sensitivity to the volatility, performance, and interest potential all vary.