The month of February leads many people to think of everything from cupids and engagements to roses and diamonds. Merriam-Webster defines the word diamond as “a native crystalline carbon that is the hardest known mineral that is usually near colorless.” Most women define diamonds as the ultimate gift of love. The true beauty of a diamond can be enhanced by the proper cutting of the stone – known as faceting. This process is designed to allow the gem to reflect light and must be carefully adjusted to maximize optical performance.
A diamond is extremely strong due to the structure of its carbon atoms. Similarly, Indexed Universal Life (IUL) is strong due to the structure of its internal components. A death benefit is at the center of this insurance diamond. Just like the carbon atoms at the core of the diamond, this benefit holds the product features together and positions them for optimal performance much like the facets of the diamond.
Unlike diamonds, however, the IUL product features multi-faceted flexibility, allowing the client to adjust premiums and death benefit as their financial picture changes during life. Many IUL products offer a guaranteed death benefit option if desired and the ability for an increasing death benefit without proving insurability if Option 2 death benefit is chosen at the time of issue. The Option 2 will move the death benefit upward as cash value within the policy increases. Policy premiums can vary to accommodate times of prosperity and times of austerity. Keep in mind a word of caution; if the guaranteed death benefit has been selected, changing the premium structure may cause the loss of the guarantee. The benefit payable at time of claim will be received free of income tax liability and outside the probate process if the policy is structured properly.
Continuing the multi-faceted flexibility discussion, a cash value component in the policy offers policyholders the opportunity to benefit when the financial markets do well. The cash value of the policy is tied to the performance of financial indices available at the time of application. Depending on the carrier, you will find more than 20 indices available to fit any client’s interest, with the S&P 500 being the most common. The initial index selection mix can be changed at contractually specified times during the policy term to allow the policyholder to take advantage of changing market conditions. Most importantly, even if the index chosen has a negative return for the year, the IUL crediting rate will not fall below zero. Some carriers even offer a minimum guaranteed rate of return.
Bear in mind that although the cash value growth is tied to the performance of certain financial indices, it is not unlimited. Carriers designate caps to put a ceiling on how much your cash value can grow if the index performs exceedingly well. Both annuity and life carriers use some of the “spread” they earn on their bond portfolio to purchase call options. When volatility and other market forces cause the cost of call options to increase, the carriers must use a greater portion of the “spread” to purchase the option, or they must purchase fewer call options. Fewer options reduce opportunity, therefore a reduced cap or maximum share of any market increase is the result.
IULs, however, have one great advantage over the indexed annuity. This is the ability for the issuing insurance company to build loads and fees into their IUL products. This provides the insurance company with more money to purchase call options, which in turn allows them to offer caps that are not only higher, but also sustainable. You should also become familiar with any policy provisions regarding participation rates, which is how much of the index appreciation the policy will be afforded. Higher caps typically generate higher returns to build more wealth. Best of all, the life contract provides potential access to wealth accumulation without paying income taxes … now that’s what we like to call “sparkle.”
One of the brightest facets in the IUL contract is the ability to fund a future retirement-type account without IRS control. Clients who hold 401(k) accounts at retirement may be adversely affected by poor market performance and may not provide the income needed during those critical non-working years. Additionally, the IRS limits the contribution amount to these accounts, as they represent pre-tax dollars. The IUL is not funded with pre-tax money but can easily be used as a tax-free source of income with proper planning. Income can be taken from the policy either as a withdrawal or a loan. As a general rule, if the client does not plan on repayment, it is best to take a withdrawal as interest will be charged on loaned money. However, due to variable loan provisions offered by many carriers, a positive (or negative) arbitrage could be created which may or may not benefit the client. Clients should be adequately informed about any loan and/or withdrawal options before making an income election.
Most carriers’ software will illustrate the internal rate of return (IRR) on the death benefit and some will illustrate the IRR on the cash value. This simple report can be a valuable tool for you to provide to other financial professionals working within the household or to present to the most sophisticated client.
Riders that provide acceleration of death benefit for terminal illness or long-term care needs, term insurance riders on primary insureds or children, overloan protection, and death benefit guarantees are just a few of the additional IUL facets that enhance the brilliance of this product. As we honor our loved ones with gifts of flowers and diamonds this month, help your clients give the ultimate gift to their loved ones – that of a secure future. Call your Life Sales Relationship Manager today to discuss how to “pop the question” with clients and help them select an indexed universal life policy that can really make their portfolios shine.
FOR AGENT USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC. 12149 – 2012/1/20