Nate has 15-plus years of life insurance distribution experience, and he is knowledgeable in both annuity and life insurance strategies. As part of the life team, he helps evaluate the ins and outs of hundreds of policies so they can recommend the best fit for an individual’s financial plan.
Permanent insurance that can provide benefits for the living
It used to be that life insurance was a choice between either inexpensive term life—which only provided a death benefit to protect family members up until the time the insured reached a certain age—or whole life, which was permanent but expensive, had limited cash value accumulation potential, and was purchased for beneficiaries for tax-advantaged transfer after death.
Enter the last few decades of innovation.
Insurance companies noticed the changing demographics and needs of the American consumer, and began to create options—a lot of them. For instance, take Indexed Universal Life (IUL). These policies were first introduced in 1997, and became popular after the Great Recession.
The 411 on IULs
If you’re not familiar with them, IULs are designed to be permanent life insurance policies, with a death benefit. But after the owner pays the premiums and fees to keep the life insurance policy in force, they can allocate cash value amounts to one or multiple index accounts (like the S&P 500) as offered by each individual IUL policy design. This allows IUL policies the potential to participate in stock market growth.
Keep in mind that the cash value amounts are not actually invested in the stock market. The index (or indexes) function only as benchmarks used by the insurance carrier when calculating the interest it will credit on the policy, usually (but not always) annually.
Because it’s an insurance contract and not a stock market investment, one of the distinguishing features of IULs is that they typically offer floors at 0% (and sometimes 1% or more). This is known as its downside protection from market volatility, guaranteed by the insurance company.
With most IUL policies, there is a cap on the upside. First of all, there is a “participation rate,” meaning annual credits are only given on a portion of the specified index’s gain. Furthermore, some IUL policies are capped at an overall crediting percentage, such as 6%, 8%, or 10%, depending on the policy.
It is important to compare policies from many carriers, because some of the newer policies are uncapped, which can offer your clients significant advantages.
Borrowing from an IUL
Borrowing is where an IUL offers real flexibility to a policy owner of any age. Unlike some types of tax-advantaged financial options, it’s not necessary to be 59-1/2 years old to borrow from your cash value.
Clients can borrow against the accumulation portion of their IUL policy and never have to pay the money back until death, as long as their premiums and fees are paid. Keeping the policy in force for life allows the beneficiaries to receive the death benefit, plus any balance of the policy’s cash value, usually tax-free.
Importantly, any amount borrowed from the cash value is also tax-free to the borrower in most cases, making it a benefit for the living. And the insurance company, while charging interest on the loan based on policy terms, also typically treats any borrowed money like it’s still there when interest is being credited.
For some retirees, accessing tax-free cash* via policy loans within an IUL can be a tremendous addition to a retirement income plan, without any RMDs (Required Minimum Distributions) to deal with. Policy riders can be added to help them cover things like long-term care if needed, too.
With long-term care (LTC) riders, it’s not a “use it or lose it” situation like traditional LTC insurance. If a policyholder never requires long-term care, any remaining policy value goes straight to the beneficiaries.
But IUL is not just for retirement
Younger policyholders not yet in retirement can use the cash value of their IUL policy to fund anything they require—like a college education* for the kids, money for a down payment on a home, or funds to start a new business.
An IUL is sometimes even used as “key man insurance” by businesses.
Fewer limits to policy amounts
Because IUL policy amounts have few limitations than many retirement saving options, have no income requirements, and offer tax advantages, people with high net worth sometimes purchase IULs once they have maxed out their 401(k)s and IRAs.
Certain IRS restrictions may apply, so it’s very important that your client understand all of the policy terms, features and tax ramifications, so they can be informed when carefully selecting what might work best for them.**
Find out more
Are you an insurance-licensed financial advisor? Quantum offers hundreds of life insurance products from 35+ life insurance carriers. Ask us about exclusive access to the newest IUL from one of the nation’s leading insurers, Nationwide®, offering uncapped index crediting.
Call Nate at 800.440.1088.
* In most cases, IULs are not included in provisional income when calculating Social Security taxation, nor are they included in assets adding to the “expected family contribution” amount for college tuition on the FAFSA (Free Application for Federal Student Aid).
** IUL policies are usually very flexible, and a client can change the amount of death benefit, and they can use cash value to pay premiums and fees.
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR USE WITH THE PUBLIC
These materials are for informational and educational purposes and are not designed, nor intended, to be applicable to any person’s individual circumstances. It should not be considered as investment advice or tax advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action. Tax advice should always be sought from a licensed tax professional or attorney. The Quantum Group, and its affiliates, have a financial interest in the sale of their products.
Life insurance products contain fees, such as mortality and expense charges (which may increase over time), and may contain restrictions such as surrender periods. Guarantees are based on the claims-paying ability of the insurance carrier.