American General has been exploring ways to provide a retirement income stream from a universal life insurance policy. Their solution is to offer an accelerated benefit feature -- but for income, not for long-term care, chronic care or other types of needs that accelerated benefit riders typically address.
Called Lifestyle Income Solution, the optional rider allows the policyowner to start taking monthly income from a portion of the base policy death benefit after at least the 15-year minimum waiting period. The feature is available with a guarantee-rich universal life (GUL) policy called AG Secure Lifetime GUL II, which is designed for older customers (ages 40 to 75) who are risk averse.
Initially distributed through American General’s career agency channel, the rider is being distributed through the brokerage and independent agency channel as well.
The monthly benefits under the rider — which the company calls “guaranteed withdrawal benefits” -- are guaranteed “regardless of the cash surrender value under the policy,” the company says.
The withdrawal period depends on the particulars of each case. For instance, a customer might select a withdrawal period of five, 10, 20 or more years after the end of the minimum 15-year waiting period.
Once the waiting period is over, the owner can elect to start income (the “withdrawals”) right away or not, and/or to start income at a different monthly amount than initially projected (within a specified range). And, once the income stream begins, the owner can stop and restart income as desired. If the person dies before all guaranteed withdrawals have been paid out, the remainder becomes part of the death benefit proceeds paid to beneficiaries.
It’s not an annuity
The company is positioning the rider as an option that can “help protect against outliving your retirement income.”
That positioning, plus the regular income flow allowed by the rider, give the product a strong resemblance to an annuity, such as a deferred income annuity (which starts paying an income stream within several or many years after policy purchase).
But this is not an annuity, emphasized Tim Heslin, vice president-product strategy andimplementation. “We don’t want it to be presented as an annuity.”
The rider is an option for a universal life policy that offers a way to use the life policy to solve for consumer needs, he said. “Not everyone can afford to buy life insurance, secure longevity insurance and also have cash available. So we wanted to have one product to match the needs” instead of separate contracts.
The target customers tend to range from the mass affluent to those with higher net worth -- people who may be ages 50 to 70 and concerned about what may happen if they outlive their retirement income, Heslin said.
The rider pays out the income stream from the policy death benefit. It does this in the same way that life policy acceleration riders for long-term care and chronic illness make their payouts from the death benefit, except that there is no qualifying medical event requirement, Heslin said.
The death benefit gradually declines as the “guaranteed withdrawal benefits” are paid out as income. The plans typically are structured to provide a death benefit to heirs, even if all guaranteed withdrawals have been made under the rider.
According to the product brochure, the rider was developed to help preserve the client’s standard of living. Hence its name, Lifestyle Income Solution. It’s a “living benefit to help supplement your retirement,” the company literature said.
In most states, the owner must elect to have a no-extra-cost terminal illness rider attached to the policy. The two riders are not linked, Heslin said. But if the policyowner has taken benefits from the terminal illness rider, that will reduce the amount available under the income rider. Conversely, if the customer is taking withdrawals under the income rider, the amount available under the terminal illness rider may be reduced. “That would depend on the size of the policy and how much has already been withdrawn,” he said.
One of the surprises associated with this rider is that insureds in good health may be charged a higher premium for the rider than those who are less healthy and/or who use tobacco. In life insurance, it’s typically the other way around: the healthier an applicant, the lower the premium. But the rider is not primary life insurance; it is an income feature with longevity exposure. Its premium reflects that longevity exposure. As the company puts it, the premium could be higher because of the greater potential for healthy people – rather than less healthy people -- to receive benefits under the rider.
How it works
Producers would structure the income to unique customer needs, taking into consideration the guarantees and flexibility built into the base policy, not discussed here.
Here is a brief example. Paul, age 55, plans to retire in about 10 years on income coming from his Social Security and 401(k). He decides to supplement this income via the income acceleration rider attached to a $490,000 GUL policy that he buys.
The rider will allow Paul to start receiving guaranteed “withdrawals” after he turns age 85 from a portion (37 percent) of the life coverage. These withdrawals will create an income stream for him of $1,504.75 a month over a 10-year period (plus any residual balance). Paul could elect to receive more per month or to receive the monthly payments for a longer period, Heslin pointed out, but for the example, this is what he chose.
If Paul dies at age 95, the total guaranteed “withdrawals” under the rider would be $180,575 (date the withdrawals begin would impact this), and the remaining death benefit would be $309,425. If Paul did not access his withdrawal benefits, the entire death benefit of $490,000 would go to the beneficiaries.
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