How IUL supplements a financial plan

Illustration of a man and woman watering a plant (labeled IUL) that is growing rapidly.

By Susan Rupe

Indexed universal life insurance makes sense for a client if it helps people accomplish their financial goals, not if it replaces their financial goals.

That was the word from Ron Lee, vice president, advanced markets and brokerage field relations at Mutual of Omaha. Lee discussed how permanent life insurance can fit into everyone’s financial plan during the National Association of Insurance and Financial Advisors Apex East event.

Prospects often balk at spending money on permanent life insurance, Lee said. “You are asking people to buy something and pay more for it than they have to. They could buy term insurance for far less,” he said.

Lee presented a scenario with a hypothetical couple, “Ted and Lisa,” who are in their 40s. “Lisa” owns a small business and “Ted” recently was promoted to vice president at his job. How can they consider ways that permanent life can help them while they are still alive?

Lee suggested looking at the couple’s assets. Are those assets diversified? Clients shouldn’t have all their assets in a single asset class. Are their assets restrictive, meaning that there would be a penalty if funds were withdrawn before the client was age 59 ½? Is there a possibility that they will need to access funds at the wrong time – such as when their assets are down or when it’s prior to retirement?

The hypothetical couple can mitigate their investment or market risk by having some fixed assets – bonds, cash, fixed annuities - in their portfolio. What about including IUL in the fixed-asset part of the portfolio?

IUL’s zero-percent floor comes at a cost, and that cost is its cap, Lee said. “Think of it as the fixed portion of the portfolio and not the equity portion and you’ll manage your client’s portfolio much better.”

During a client’s accumulation years, IUL can be a diversified asset to the portfolio, Lee said. IUL can offer return of premium, tax diversification and lower annual fees and costs than other investments, he said.

The cash value in IUL provides an opportunity for growth without downside risk, protecting the client’s financial plan during their lifetime, Lee said. The cash value is available for the policyholder at any age and for any reason. It can be used for unexpected needs, there is not requirement for the policyholder to wait until age 50 ½ to withdraw funds and there is no requirement for the policyholder to take required minimum distributions.

IUL provides clients with tax-advantaged withdrawals and tax-deferred growth in cash value, Lee said. In addition, he said, IUL policy values and proceeds are typically given some protection against creditors and can provide collateral for a loan.

Lee said there are benefits for a client having IUL in retirement. IUL provides a source of tax-free retirement income. IUL’s annual reset is important in the distribution phase of a client’s financial lifetime, he said, addressing the sequence of returns risk in case the client’s portfolio loses money in the early years of retirement.

“None of your client’s assets allows them to earn money on ‘borrowed’ money,” Lee said. But IUL’s index loan option allows for interest crediting on borrowed funds if the index performs above the loan rate being charged.

IUL is a risk management tool, he said, and listed several risks that IUL addresses.

Tax bracket risk. Could the income your client draws from certain assets in retirement increase the taxes they pay overall? Could taxes increase by the time your client is ready to retire?
Sequence of returns risk. What happens if your client needs to draw income from assets in down years, especially when the client is early in retirement? IUL’s annual reset addresses the sequence of returns risk.
Longevity risk. What if your client spends too much in retirement? Life insurance “refills the bucket” for the surviving spouse after the client’s death.
Health care risk. If your client needs care, will they have to spend down their other assets too quickly? Will that affect their tax brackets and portfolio sustainability? Life insurance has long-term care or chronic illness riders to help address that risk.
Change of situation risk. Sometimes the need for life insurance goes away and sometimes the ability to pay goes away. Life insurance has cash surrender value.
Social Security risk. A couple will face a reduction in income due to the loss of the lowest Social Security check upon the death of the first spouse. Life insurance can help replace that income.

“IUL is the perfect unique asset to add to your client’s portfolio,” Lee said. “It has qualities that nothing else has. Let’s make a coordinated financial plan and let’s have a place for IUL in it.”Joh

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.