As an advisor, you’re in the business of helping clients achieve financial independence. A key aspect of creating this reality is setting them up to live comfortably and confidently throughout retirement, no matter how many years that may last.
In the process of doing so,you educate these individuals, couples and business owners about the strategies that can help them reach their goals and the products that are integral to making these strategies successful. Yet, given the myriad of misinformation that exists on the features and benefits of various financial vehicles, you must prepare people for what they may hear.
The first IUL product was introduced in 1997 due in large part to the momentum fixed indexed annuities sales had gained in previous years. IUL was positioned as a hybrid between fixed and variable life insurance, and marketed to consumers interested in the combination of downside protection and upside potential.
Despite the value of IUL as an asset class for long-term savings and its uniqueness in the market, several misconceptions about this product exist as driven by these
1) “Google risk,”, stems from consumers’ ability to search the web for information that may or may not be biased from various authors for various reasons without an objective resource for making sense of the claims.
2) OTHER ADVISORS
Some advisors such as pure investment managers may not sell insurance products; therefore, they offer misinformation because they are unfamiliar with IUL or fear losing assets under management.
3) WHOLE LIFE and TERM ONLY INSURANCE PRODUCERS
While whole life insurance can be a great option for some clients, certain producers who offer this solution see IUL as competition because of its ability to meet multiple client needs at once. Many captive insurance companies don’t sell IUL- Nothwerst Mutual, MassMutual Primerica just to name a few and don’t understand it.
TV AND RADIO talking heads
Even famous advisors like Dave Ramsey, (Suze Orman) who maybe great at helping individuals reduce debt, budget successfully and plan financially, is mistaken about the true value of IUL, and therefore spreads misinformation through various marketing channels.
Myths and Misconception about IUL:
1) IUL is only for young people
Some consumers think that older people don’t need life insurance or that their age immediately prices them out of the market. In truth, IUL presents a tremendous opportunity for individuals to address several needs at any age.
Let’s explore three population segments more in depth.
Younger individuals, particularly those who are unmarried and without children, may not even consider the need for life insurance at this point in their lives. They may think of life insurance in terms of a death benefit only.
However, you have the ability to help them use IUL as an alternative to a standard retirement savings plan, such as an IRA or 401(k). Many individuals early in their careers are pressed to contribute to such a plan. Though it can be beneficial to put enough money in to take advantage of any match an employer offers, this creates a tax trap. Funding an IUL policy may be a much better solution.
For those approaching the preservation and distribution phases of life, their assets may be primarily located in taxable and/or tax- deferred accounts. Therefore, you can show
them how to diversify by shifting a portion of their assets into a tax-free option.
In doing so, you may find the sweet spot is typically a 5-pay or other limited pay product. By front-loading their contributions, they can get the most bang for their buck. Not only
can they use the asset for supplemental,
tax-free income in retirement, they can take comfort in the accelerated death benefit (Living Benefits) many IUL policies offer. Essentially, these policies allow owners to use the death benefit while still alive if they qualify for long-term care or other medical expenses.
AGES EARLY 60s TO MID-70s
As individuals at or in retirement, this segment may be looking to find a way to secure their savings and still grow it. Uninterested in taking chances in the market and tired of earning no interest in safe-money assets, they may find IUL (or GUL) a welcome alternative that offers both safety and growth.
Go-to options for boomers may include either a 5-pay or single premium product. The single premium IUL can combine liquid- ity, upside potential, downside protection, and guarantees of either a minimum return or return of premium (ROP), making it a great CD or money market alternative. What’s even more exciting to this group may be the opportunity to provide loved ones a larger tax-free death benefit should the asset go untouched by its owner.
2) IUL Only works in a “Good Market”
This misconception is often said by whole life detractors when bringing up the question “What if the market doesn’t do so well?” To combat this myth, we must first understand the power of indexing. Indexing offers clients a way to capture a portion of the market’s rise up while being protected from the market’s drop through a zero floor (in other words, no interest is credited). In addition to these features, clients don’t “give back” past gains like traditional investment option, so there is no recovery needed from downturns. You can think of it as a ratchet pattern return. To examine this concept further, let’s explore how IUL might have per- formed during the worst decade in S&P history.
THE POWER OF INDEXING
In periods of market decline, the zero floor protects the asset from loss.
From 2000 to 2009, the decade in which the Great Recession occurred, total returns of the market including dividends was approximately -1.0% per year for the 10-year period. If a client had an IUL policy during this time, how bad could things have gotten? (also see Lock and Reset)
If a client had an IUL policy during this time (2000-2009), how bad could things have gotten? Historical crediting rates show that the power of indexing would have led an S&P 500 point-to-point crediting strategy with a 12.5%2 cap to have returned 5.2% to a client’s account. (see attached graph)
Now, what if this decade repeated itself over and over for the rest of the client’s life? Even in times when negative returns are pervasive, the product behaves extremely well. In the context of an investment environment, “bad” may not actually be that bad.
3) IUL is Too Expensive
This is the most common myth communicated in the marketplace today. You may have even heard other advisors who don’t understand all the features and benefits of IUL saying it.
To truly determine how IUL costs stack up, we must ask more specifically, is IUL expensive
compared to what?
If you run a standard insurance carrier illustration, you would see an output consisting of an array of expenses by year with no context, only dollar amounts. These would include loads, the cost of insurance and additional expenses. Ultimately, this can be confusing and overwhelming to advisors, let alone clients. To make sense of it all, we must convert these numbers so that the costs are expressed as an average percentage of assets — in this case, the cash value of the policy— instead of year-by-year dollar amounts. When transformed in this way, we can make the cost of IUL compatible and comparable to other vehicles in the marketplace.
First, let’s consider the cost of other popular savings products available to provide some context for answering our question.
• Average annual fees Small-Employer 401(k): 1.27%
• Average annual fees Managed Account: 2.04%
• Variable Annuities: 3.00%
Now what, on average, does IUL cost “all in”? Here are a few hypothetical examples:
DAVID, CPA, AGE 45
In this case, David is using IUL as a typical
401(k) alternative. He plans to put money in the policy until 65, at which time he will start borrowing out tax-free loans to create a supplemental income stream in retirement. Remember, if he were using a 401(k), he could be paying 1.27% or more in annual fees. However, with IUL, we show him paying just 0.42%.
BILL, ATTORNEY, AGE 55
Bill, a pre-retiree, wants to shift a portion of his savings into a tax-free alternative to better diversify his portfolio. His advisor suggests a 5-pay solution that will allow him to contribute a portion of funds each year for the next five years to fund the policy.
In addition to the tax benefits he will receive, the cost of his IUL is 0.95%.
DENNY & DEL, HUSBAND & WIFE, BOTH AGE 65
Finally, let’s consider Denny and Del, a couple who are at retirement age. For them, we select a joint last-to-die policy, which may be a good option for couples older than age
60. Despite their older age, the couple can enjoy all the benefits of IUL and expect to pay just 1.11% each year.
If you have clients concerned with long-term savings potential, stock market risk, taxes and long-term care costs, IUL may be a valuable solution to consider.
Using this powerful vehicle, clients can get protection from the power of indexing (upside po- tential with market’s down side protection), tax-free returns, and the opportunity to address long-term care or other medical expenses should the need arise. Plus, because this is a life insurance product, they can create a legacy for loved ones through the policy’s death benefit over and above the account value. This added bonus isn’t available in any other vehicle, and it’s paid tax free to those heirs.
Now that you’re armed with the information you need to educate clients about the value and benefits of IUL, you can make it an arrow in your product quiver and successfully combat the myths that surround this strategy.