Balance Your Client’s Portfolio’s Risk And Return Potential With Indexed Universal Life

Does your current strategy for clients offer accumulation potential without adding market risks? If you’re seeking a financial strategy that can help balance a portfolio’s risk and return potential, then you’re going to need to include a mixture of various financial assets and financial vehicles that can help address your needs. While it’s true that some risks are unavoidable, you can help mitigate some of their effects. Some of those financial risks are market volatility, taxes, longevity, and inflation. Some of the primary asset classes are things like equities, fixed income, money markets, cash, and real estate. Lack of diversification can lead to financial shortfalls that can impact your client’s retirement when preparing for the future, and that’s why diversification is key when it comes to spreading out market risk.

Many of these asset classes are correlated directly to the stock market in the form of financial vehicles like stocks and bonds and other market assets. When those assets fall, a financial portfolio could fall as well. That’s why it’s important to diversify into other financial vehicles that react differently to the market environment which could spread market risk, and your client’s portfolio can grow with fewer bumps in the road.

A low correlation asset can positively impact a retirement portfolio. A low correlation asset won’t be as severely impacted by the fluctuations of the market, such as an indexed universal life policy (IUL). Along with the ability to earn index interests, it also offers protection in the form of a death benefit, and it can help reduce the risk in an overall retirement portfolio during periods of market volatility.

An IUL offers financial reassurance to your client’s beneficiaries; an income-tax-free death benefit is paid to beneficiaries regardless of market conditions. It offers tax diversification, which can be an effective tool to manage how much and when assets are taxed. It offers tax-free growth and income tax-free policy loans and withdrawals. In addition to tax diversification it offers portfolio diversification. It’s an asset that has varying reactions to the market environment. A client can earn index interest based on an external market index with an additional level of protection with a zero percent floor. IUL clients are not directly invested in any equities or fixed-income vehicles and don’t own shares of an index. Finally, an IUL offers access and flexibility which allows clients to address any immediate financial concerns. They can access their cash value through income tax-free policy loans or withdrawals for any purpose at any time.

Taking on considerable risk and limiting how much you diversify could lead to substantial losses due to market volatility, and the time to recover from those losses could be significant. Over the last 25 years, the S&P 500 index has been negative for six of them. If the market goes down and you suffer a 15 percent, 20 percent loss, or even worse like we did in 2008 or 2009, it could take a long time to recover from those losses. If your clients had an IUL policy during those years, it would have received a zero percent credit, which is a significant improvement when compared to suffering a 30 percent loss. If a client were to suffer a 30 percent loss to his or her retirement portfolio, it would take a total return of 43 percent to recoup those losses. People approaching retirement don’t have unlimited time to recover losses that large. With IUL, zero is your hero. This means that although an IUL policy may not receive an index interest credit during volatile times, cash value will remain flat and unaffected by market loss. An IUL policy may not be able to protect other assets from losses, but it can help reduce the risk within an overall portfolio and help lessen the blow if there is a big loss down the road.

When it comes to financial planning, protection and preservation of wealth are of the utmost importance, particularly in unpredictable market conditions. To reduce risk and possibly increase returns over time, diversification is key. Adding a low correlation asset like an IUL policy can help your client diversify the risk and accumulation potential of his or her portfolio.

Sean Brady is an advanced case designer at LifePro Financial Services, Inc. He works with financial professionals designing advanced case solutions that are built for longevity and the best interest of the client.

Brady can be reached at LifePro Financial Services, Inc., 11512 El Camino Real, Suite 100, San Diego, California 92130.