IUL sales were up 2% in Q3, and they’re up 22% YTD. What’s driving these sales, and what makes an IUL such a unique product?
While nearly all life insurance product lines dipped in the third quarter of 2022, sales of indexed universal life policies, or IULs, stood strong, increasing 2% for the quarter and rising to 22% year-to-date.
So, what makes indexed universal life policies so appealing right now? Let’s review some basics.
- IUL Is Permanent Insurance
Term life comes with low premiums for the young and healthy and offers a tax-free death benefit to spouses and family members when they are named as direct beneficiaries. But term policies are use-it-or-lose-it, and after the term is up, beneficiaries will not receive a death benefit unless your client purchases a new policy. Conversely, permanent insurance can build value and is designed to last for life, offering a way to provide tax advantaged wealth transfer to heirs upon your client’s passing.
Permanent insurance is available for purchase at nearly any age by healthy people, but sometimes requires a medical examination and is subject to underwriting.
- IUL Is Different Than Whole Life or Variable Life
Whole life and variable life insurance policies are also permanent policies, with an insurance component as well as a cash value component. But indexed universal life offers a couple of key differences:
a.) Flexible Premiums
A key benefit of IUL versus whole life policies is flexible premiums. With whole life, premiums are locked in, offering policyholders little flexibility. If a policyholder can’t pay the premiums—say, in a low-earning or difficult year—the policy is no longer in force.
An IUL policy allows the insurant to determine the premiums based on their unique circumstances and the amount of coverage needed, and an IUL policy can be customized to fit the needs of a client based on their desired death benefit, optional riders and cash value amount.
b.) Growth Linked to a Market Index
A key benefit of IULs versus variable life policies is that with an IUL, the cash value component grows at a rate linked to a market index, however the money isn’t actually invested in the market. With variable life, because it’s invested in the market, the cash value portion can drop in value due to stock market volatility like we’ve seen in 2022.
An IUL is a contract between the policy owner and the insurance company, and insurance companies compete to offer better terms and better market index designs to consumers. Lately, with the advent of higher interest rates, IULs have been able to offer increasingly appealing guarantees. For the cash value portion, some IUL policies offer a certain percentage of growth regardless of market index performance and some offer uncapped growth. Virtually all offer protection against any stock market losses. As with all insurance, guarantees are based on the claims-paying ability of the issuing insurance company.
- IUL Offers Living Benefits
Permanent insurance like IUL can offer significant benefits during a policy owner’s lifetime, especially for retirees.
a.) Retirement Income
Like all permanent insurance policies, one of the key features of an IUL is its cash value component. The cash value component can help make tax advantaged money available for retirement in the form of tax-free policy loans. Interest is charged by the policy for loans based on contract terms, but if structured correctly, the policy can pay for them out of the interest or gains, or by reducing the death benefit amount while keeping the policy in force.
Because borrowing money from the cash value portion of an IUL policy is tax-free, this can be a very appealing way to generate retirement income. Planning to take retirement income from an IUL policy can often work out to be the most financially advantageous if clients can purchase the entire policy upfront rather than paying premiums.
b.) Policy Customization
A policyholder can customize their IUL policy to fill their potential needs with riders that cover things like terminal, chronic and critical illnesses. Oftentimes, specialized care in the event of serious illness can be expensive, and it isn’t always covered by health insurance. An IUL can supplement savings and health coverage to keep costs reasonable.
Additionally, a long-term care rider can be added to an IUL policy, which can be a good idea considering the cost of long-term care along with the fact that it isn’t covered by Medicare. With today’s hybrid policies, the insured can be covered if they need long-term care, or they can pay their beneficiaries a death benefit if they don’t.
This is a very appealing alternative to traditional long term care coverage, which is essentially wasted money if your client never ends up needing care.
- Principal Protection
To reiterate a very important point, given that an IUL policy is a contract between the insurance company and the policyholder rather than a direct investment in the market, the cash value’s principal is protected, and gains are locked in based on the claims-paying ability of the insurance company. That means that your clients don’t have to experience market volatility and declines despite participating in a market index potential upside.
Variable universal life, which was down 12% in quarter three and invests the cash value portion similarly to the way a mutual fund does, does not offer protection against market drops like IUL does. For those looking to fight retirement risks like sequence of returns risk, which makes the entry point and the first few years of retirement an extremely dangerous time to experience market downturns, principal protection can be extremely valuable.
To receive a customized IUL case design for your specific client, please call us at 800.440.1088.
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.