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Marcus Kiel

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Marcus Kiel is a field support representative at LifePro Financial Services. He is a licensed life and health agent. Prior to working for LifePro Kiel was an agent for one of the largest mutual life companies in the United States. He brings his knowledge, experience and expertise from the field to hundreds of advisors nationwide. Kiel can be reached at LifePro Financial Services, Inc., 11512 El Camino Real, Suite 100, San Diego, California 92130. Telephone: 888-543-3776, ext. 3284. Email: Marcus@lifepro.com.

Will You Outlive Your Money?

Marcus Kiel
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Will You Outlive Your Money?

Using an IUL Strategy to Supplement Your Retirement Income, Plan for the Worst in Life, and Address Declining Health in Mature Age

My grandmother and grandfather had seven kids and lived in a southern state. The kids were known as the “The Magnificent Seven,” an homage to a popular western at the time. When my grandmother matured to old age, life transpired along the way. My grandparents lost their oldest child while she attended college. My grandfather passed away and left my grandmother to live out the rest of her days alone. She was surrounded by love, but all the kids were spread out across the country. When we traveled down to visit her later in her life, we recognized that her memory was declining. It started with her sense of smell, then escalated to forgetting to turn off the oven or forgetting the way home after running errands. My grandmother was diagnosed with Alzheimer’s disease. At first she only needed day care, but her condition worsened progressively requiring round the clock care. Ultimately, she spent her last days peacefully in a hospice facility.

You may be asking yourself, “Why did he begin with such a sad story?” A better question is, “Who paid for the care she received later in life as her health declined?” You guessed it, the six children who reached adulthood and had kids of their own. They all chipped in to cover a multitude of bills including: Groceries, housing costs, in home care, and everything else not covered by Social Security and savings. The closest adult children would travel down and watch her on the weekend to cut costs. What if there was a product that could help supplement your retirement income, cover your beneficiaries in the case of premature death, and supplement your health care costs if you were to suffer a terminal, chronic, or critical illness? That product is a fixed indexed universal life product (IUL) with living benefits.

An IUL product at the end of the day is life insurance. Clients must have an insurable interest, are subject to underwriting based on health, and must have the funds to purchase this product. The funds to supplement one’s retirement do not have to come from one’s checking account. A client does not have to cut back on their desire to have daily fancy coffee creations or avocado toast, even though cutting back to a few days a week could be a good idea. The funds could come from repurposing money from other financial vehicles. If the client is paying above the match for their 401k or 400 series tax-deferred account, it would be wise to use the excess to fund IUL premiums. The IUL grows tax-deferred just like the 400 series tax-deferred account. The big differences with the IUL are: 1) you can withdraw funds tax-free; 2) your beneficiaries can receive a death benefit income tax-free; 3) funds can be used for living benefits; and, 4) IUL cash value is not susceptible to stock market volatility.

IULs are tied to the market, but not in the market. Traditional IULs have a zero percent floor. While newer products still have the zero percent floor, they can also be subject to asset fees in mediocre or poor years. For more insight on this topic, please read my September, 2019, Broker World article, “Is Zero Still Your Hero? How High Fees And Bonuses Have Adjusted The IUL Landscape.”

When comparing an IUL product to mutual funds or stocks, there are notable differences. The gains on market-based products can be astronomical, but so can the losses. With an IUL, since the money is not in the market, insurance carriers can guarantee a zero percent floor. Using uncapped strategies and/or high participation rates an IUL can see index credits in the double digits. But to be conservative and based on AG49 Regulations, IUL products generally are not illustrated above seven percent. In addition to being immune to stock market volatility, if done properly, an IUL is not subject to taxes upon withdrawal. If a client needs to purchase a vehicle, pay down credit card debt, pay for college, or put a down payment on a house, they can withdraw funds from their IUL income tax-free. Additionally, if the client takes out the funds as a participating loan, the client does not lose the ability for those funds to gain an index credit. The funds could still receive positive interest based on the difference in index credit and loan rate.

Whether the client repurposes the funds from their tax-deferred account, i.e. 401k, or their mutual fund, or both, the goal is the same—purchase an IUL to supplement retirement income in the future. For example, a client retires at 65 and is looking to postpone taking Social Security to the maximum age of 70, they could use a portion of their cash value in their IUL to supplement their retirement from ages 65 to 70, thus holding off accessing their Social Security. The income tax-free loans do not have to stop at age 70 and, if properly designed and funded, loans could be taken out from age 65 to age 100 and beyond, thereby preventing a client from outliving their money.

What happens if the unexpected happens? We all know life insurance can cover a percentage of one’s estimated lifetime earnings and can be distributed to beneficiaries tax-free upon death. (Which is something market-based products, 401ks, and other tax-deferred accounts cannot replicate.) What if the unfortunate happens while you are still alive? Whether your client contracts a terminal illness with a two-year life expectancy, or cannot perform multiple activities of daily living (ADLs), or suffers cognitive impairment, wouldn’t it give them peace of mind knowing their IUL can accelerate a portion of their death benefit to cover medical expenses or whatever they choose to spend money on upon diagnosis? When comparing an IUL to other financial vehicles, apart from the differences mentioned earlier, one key difference is the IUL can help with medical bills upon suffering physical or cognitive impairment.

When my grandmother was unable to perform two out of the six ADLs, my family would have been in a better position to pay her medical expenses if this superb product was available back then. I do not know you or your client’s family dynamic. I do know I do not want to burden my wife and daughter with the costs of a critical, chronic, or terminal illness diagnosis. If something unfortunate happens prematurely, I want to make sure my family is not only taken care of, I also want to ensure the financial burden incurred by declining health in old age is taken care of as well. A fixed indexed universal life (IUL) product is a great vehicle to cover costs associated with premature death, can supplement one’s retirement income, and can be accessed while living even when subject to debilitating illness. Due to those reasons, and the fact that other financial vehicles cannot replicate those features, don’t you think it’s time to add an IUL with living benefits to your product portfolio? 

Is Zero Still Your Hero?

Marcus Kiel
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Is Zero Still Your Hero?

How High Fees and Bonuses Have Adjusted the IUL Landscape

When I first learned of indexed universal life (IUL) products years ago, I was taught that, “Zero is your hero.” As you are most likely aware, this product is tied to the stock market but isn’t actually “in” the market. Hence, when the market is negative you won’t lose cash value to negative market returns. Negative returns result in a simple yet comforting zero index credit to your policy. There is still the cost of insurance and other fees; however, these costs are not deemed significant because competitive products can have low costs and are viewed simply as the cost of doing business. I was taught, “IUL costs and fees are high in the early years but decrease as the policy matures and access to cash is needed most.” That statement rings true today, but should be amended to exclude “early years.” The new statement should be, “IUL costs and fees can be high, based on your risk tolerance, and can continue to be high every year you own the contract.” It should not stop there since, comparing IULs to 401(k)s and mutual funds, the IUL traditionally has had lower costs and fees than investments in the other vehicles. This is no longer the case with the high bonus and high fee IUL products. With today’s new generation of IUL products, which include additional costs as high as a six percent asset charge per year, a key selling point (low cost) of IULs no longer applies. This begs the question, is zero still your hero?

With the introduction of AG49 in 2015, illustrations became more uniform in nature. Max uniform caps on illustrated rates were mandated. This uniformity birthed a frenzy of innovation. Illustration wars were tabled, but the battle for highest bonus had begun. With the introduction of high bonuses came an additional layer of fees. The question no longer was, “What is the illustration rate?” It has now become, “How big is the bonus?” The latter question should be followed up with, “What are the fees?” These new bonuses bring an extra expense inside the policy that means we can no longer say, “Zero is our Hero.” In most cases, consumers will not do a deep dive into policy costs to see exactly how much these bonuses will cost them over time. The onus is on the advisor to be transparent when talking about fees and be able to thoroughly explain illustrations and the inner workings of an IUL contract. It is easier for advisors to purposely ignore these additional costs than to delve deeper. The advisor should also be able to explain that in some cases fees are taken first, can reduce potential returns, and add up over time.

When discussing fees, illustrations have shown that in a high index credit year high fees are tolerable. Not many clients will complain about double-digit net returns after fees or asset charges, and bonuses or multipliers, are applied. In great index credit years, high fee and high bonus products look phenomenal. The problem occurs when we look at moderate, zero, and negative years. For example, using purely hypothetical numbers, let’s take a five percent asset charge and 200 percent multiplier IUL that returns a positive interest credit of two percent. At the end of the year the net result is a minus one charge (-5 + 2(200%) = -1). If the policy earns a zero or negative interest credit the net result is a minus five charge (-5 + 0(200%) = -5). As you can see moderate, zero, and negative interest credits can produce an asset charge assessed to the cash value. Imagine an annual review where you have to tell your client that their policy received an interest credit but still lost money. The high bonus/multiplier high fee IUL product satisfies an aggressive risk tolerance profile. This profile can represent an ideal IUL client, aged between 35 and 55. They must also have a long time horizon and not be concerned with the sequence of returns. For clients over 55 and premium finance cases, this high bonus, high fee IUL may be cost prohibitive.

When comparing fees and expenses of traditional IULs to 401(k)s and mutual funds the cost over time of the IULs could be significantly less. Depending on age however, with high bonus, high fee IULs the inverse is true. Take for example a client over 55. The client is in their early 70’s and purchases a high bonus, high fee IUL with a sizeable bucket. Hypothetically, at age 85, the high bonus, high fee IUL can be two to five times higher than alternative investments. When looking at the actual numbers, the fees from the IUL compared to a taxable account are jarring.

Two main selling points of a traditional IUL have been low fees compared to 401(k)s and mutual funds, and protection from negative market returns. With the advent of the high bonus/multiplier, high fee IUL products this is no longer the case. On the risk tolerance scale, someone with a conservative or moderate risk profile can still enjoy the cash accumulation benefits of a traditional IUL. But the way the industry is headed due to increased regulation, the risk profile may change with it. These new high bonus, high fee IUL products are more of a hybrid variable universal life (VUL) type product. In many cases they are “High Risk IULs” and suit a younger and more aggressive clientele. Ideally, IUL products should offer allocation options that cater to a client’s risk tolerance. For the saver, they can choose the fixed account, or a low to no fee, or low to no bonus option. For the younger more aggressive client, they can go all in with a high bonus/multiplier, high fee option considering they know the risk involved. The answer to the question presented in the title is not answered with a simple yes or no, the answer depends on your outlook on life. If you are a glass half full person, a positive index credit number will be your new zero, anywhere from plus three to plus six. To receive a zero with a high fee and bonus IUL, the policy would have to return a number slightly higher than the asset fee to not lose money. If you are a glass half empty person, a negative number will be your new zero. If the IUL policy receives an interest credit that is moderate or zero the net result will be a negative number. How comfortable are you with a minus one to minus three net result? When crunching the numbers on the high bonus, high fee IUL products, the concept of “Zero is your hero” needs to be reimagined.

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