Making The Case For Index Universal Life Insurance

    During 2012, total life insurance sales increased by just one percent1 and sales were flat in 2013.2 While these were by no means banner years for the industry overall, particularly hard hit were sales of guarantee universal life (GUL) insurance products, which saw sales decline by one percent in 2012 and 26 percent in 2013.3 GUL sales nosedived further in the first quarter of 2014, with sales dropping a staggering 48 percent.4

    While GUL sales growth has screeched to a halt, sales of index universal life (IUL) insurance have skyrocketed. Sales were up 13 percent in 2013,5 following a three-year average increase of more than 30 percent.6 In fact, IUL sales are up 177 percent since 2009,7 a stark contrast to the life insurance industry in general, and GUL in particular. Furthermore, IUL sales increased by 15 percent in the first quarter of 20148 and the product now represents 42 percent of all UL sales.9 There is now more premium being sold in IUL products than there is in GUL products!

    The Trend Can Be Your Friend

    Let’s take a look at the forces driving these sales trends and how to develop a successful approach to tapping into the growth opportunity presented by IUL.

    First, it helps to understand the two main reasons for this decline. The first is the increased cost of fully guaranteed products due to the new reserve requirements introduced by the National Association of Insurance Commissioners (NAIC) in late 2012. The continued low interest rate environment makes it difficult, if not impossible, for insurance carriers to be able to support the robust guarantees of the past for the same premium. The end result may be more expensive products as well as carriers just flat-out exiting the market.

    The second reason for the GUL sales drop-off is that because of the higher premium requirements, much of the GUL sales have shifted to other product lines such as IUL and whole life. In other words, since the guarantees cost so much more than in the past, it becomes harder to justify paying such a significant premium for the same guarantee while also missing out on the flexibility that comes along with the cash value potential inherent in other types of products.

    That IUL sales are up so dramatically over the past few years reflects the fact that consumers are demanding more flexibility and versatility than a GUL policy can offer. Clearly there is more flexibility and versatility that comes with greater cash value potential. This potential for greater cash value can be achieved by linking the upside (subject to a cap) to an index such as the S&P 500 Index. But if the percentage change in the index is negative in a given segment period, the interest credit is zero, not negative, and the principal is protected from the negative percentage change in the index. While equities have performed well the past few years, investors remember all too well the nearly 40 percent drubbing the S&P 500 Index took in 2008, not to mention the three consecutive years of double digit losses the index experienced in 2000, 2001 and 2002.10 This notion of providing equity-linked capped upside potential while protecting the policy cash value against potentially steep declines in the market has clearly created enthusiasm among many investors and their trusted advisors.

    The Value Triangle

    A compelling sales tool to leverage when talking to clients about the trade-offs inherent with selecting one product over another is expressed in the the “value triangle”.

    The value triangle clearly outlines the trade-offs between three different considerations of those seeking life insurance protection: premium requirements, the length of the no-lapse guarantee, and the potential cash value between GUL and IUL.

    So let’s look at a hypothetical client, Marty, age 60, who has been married to Rita for more than 40 years. They have raised a family and built a substantial nest egg for a secure future. However, recently, in anticipation of Marty’s retirement, they purchased a new home near the coast and their grandchildren. This home cost about $500,000.

    While Marty and Rita are currently financially comfortable, they would like the mortgage to be paid off if Marty were to pass away, so Rita can continue to live comfortably without having the burden of the mortgage. In order to help create security and protection for Rita, the couple considered both GUL and IUL.

    Marty and Rita’s insurance agent used the value triangle to help them determine an insurance solution that could fit their unique situation. Based on Marty’s age, assuming current charges as of December 8, 2013, a 7 percent illustrated rate, a cap of 14 percent, and a participation rate of 100 percent with the one-year cap base crediting strategy throughout the life of the policy, using a preferred no nicotine use underwriting class, the IUL would require a premium of $7,364 versus $8,749 on the GUL product.* Thus, the IUL product with coverage on Marty would save the couple nearly $1,400 per year on their premium. (Note: Using the same IUL assumptions and illustrated at 6 percent, the IUL would save the couple around $500 per year versus the GUL.)

    Marty and Rita also prefer the upside potential that the index-linked crediting strategies offer. This equated to an estimated $150,000 of cash value on the IUL in 20 years versus only $25,000 for GUL.* Considering the fact that $150,000 in cash value can potentially be available in year 20 when they only paid $147,280 ($7364 for 20 years) in premium is a very powerful proposition. For their situation, the planned premium savings and potential to build greater cash value with index-linked crediting strategies offset the difference in the length of the death-benefit guarantee (lifetime guarantee for GUL versus to age 80 for IUL). So, in the end, Marty and Rita chose the IUL policy.

    Discussing the Trade-offs…

    with Ears Wide Open

    Listening to your clients’ needs and discussing their available options and trade-offs (using the value triangle) can be a significant competitive advantage. Through the conversations with  Marty and Rita, their insurance professional realized that they were also concerned about the impact that long term care expenses could have on their retirement. In addition to competitive planned premiums and the opportunity to build cash value, they were also interested in hearing about insurance solutions to cover potential long term care costs.

    Certain providers, including Genworth, offer riders that enable the policyowner to add federally tax-qualified long term care coverage to an IUL policy. This ability to include long term care coverage alongside an IUL policy can be the icing on the cake for the client.

    Disclosures

    It is important to understand if the index interest credited to the policy is less than the assumptions used, your client’s distribution strategy may have to be curtailed, as the policy would have a higher likelihood of lapsing using the current scenario of distributions. Conversely, if the index interest credited to the policy were greater than the assumptions used, your client would likely have even more flexibility with regard to his distribution strategy.

    Although the policy value may be affected by the performance of an index, the policy is not a security and does not directly or indirectly participate in any stock, equity or similar investment including but not limited to any dividend payments attributed to any such investment. Market indices do not include dividends paid on the underlying stocks, and therefore do not reflect the total return of the underlying stocks. 

    This article is only a summary of coverage. Policy terms and provisions will prevail.

    Footnotes:

     1. LIMRA news release, “LIMRA Individual Life Insurance Sales Improve For Third Consecutive Year,” March 7, 2013.

     2. LIMRA news release, “LIMRA Reports Individual Life Insurance Sales Flat in 2013,” March 13, 2014.

     3. LIMRA, 4Q 2013.

     4. LIMRA’s U.S. Retail Individual Life Insurance Sales, First Quarter 2014.

     5. LIMRA news release, “LIMRA Reports Individual Life Insurance Sales Flat in 2013,” March 13, 2014.

     6. LIMRA, U.S. Retail Individual Life Insurance Sales, 4Q 2013.

     7. ibid.

     8. LIMRA’s U.S. Retail Individual Life Insurance Sales, First Quarter 2014.

     9. ibid.

     10. Yahoo! Finance, S&P 500 Index Charts for 2008 and 2000-2002, July 22, 2014.

    Charlie Gipple, CLU, ChFC, CFP, is the owner of CG Financial Group, an innovative and full-service independent marketing organization (IMO) that serves independent agents that sell life insurance, annuities and asset-based long term care. He also owns “The Retirement Academy” (www.retirement-academy.com), which is a subscription based online training platform for agents, reps, and company wholesalers.

    Gipple is recognized throughout the industry as one of the foremost thought leaders and subject matter experts on annuities, life insurance, long term care, leadership, storyselling and behavioral finance. He is also an industry keynote speaker conducting 100-150 speeches per year. He has spoken at the MDRT Top of the Table as well as other large forums and has also appeared on TheStreet.com and AM Best TV.

    Gipple has vast leadership experience in the insurance industry as he has been an executive of various insurance companies and large independent marketing organizations. He is unique in his broad knowledge across the life insurance, annuities and securities businesses. Additionally, within these businesses, he has a deep understanding of the distribution aspects of these products along with the actuarial and hedging aspects. He holds a bachelor’s degree in Finance from the University of Northern Iowa, is FINRA Series 7 and Series 66 licensed and also holds the CLU, ChFC, and CFP designations.

    Gipple can be reached by phone at 515-986-3065. Email: cgipple@cgfinancialgroupllc.com.