Innovations within permanent life insurance have made the category much more dynamic in recent years and worth considering for clients in need of death benefit protection as well as more flexible options for their finances.
So why do permanent life insurance products not get the attention they deserve? Simply put, too many people are unaware of the potential opportunity for additional living and tax advantages that may be available through permanent life insurance.
We initially discovered this lack of awareness through our 2018 Life Insurance Needs Study.* The study found that more than half of respondents (51 percent) were unsure or didn’t believe cash value from permanent life insurance can be used to help fund college education, supplement retirement income or assist with other financial needs. Additionally, a full two thirds (66 percent) said they were unsure or didn’t believe benefits paid from life insurance are not taxable.
We commissioned the again in 2019** and found a similar education gap, but this time the cause for concern is specific to women. Unfortunately, women are trailing men in their awareness about additional potential benefits that permanent life insurance can offer—knowledge that could help women build more flexibility in their (or their family’s) financial portfolio.
Only 34 percent of women believe that the available cash value from a permanent life insurance policy can be used to help fund education, retirement or other financial needs versus more than half (51 percent) of men. Furthermore, only about one- quarter (27 percent) of women know that death benefits paid from life insurance are generally not taxable versus 38 percent of men.
Most concerning, only one-third of women believe that any available cash value from a permanent life insurance policy can be used to supplement retirement income while you are still alive versus more than half (52 percent) of men who know it can be used for that purpose.
The survey, which questioned Americans between the ages of 35-60 with an annual household income of $100,000 or more, also found that fewer people who work with a financial professional are discussing permanent life insurance benefits with their financial professional than they did last year. These include discussions about sources of potentially tax-free retirement income (67 percent versus 75 percent in 2018), ways to fund their child’s college education (60 percent versus 70 percent in 2018), and financial products that offer low/no interest loans against its cash value (45 percent versus 52 percent in 2018).
Focus on Education Needed
Women play a significant role in family finances, so it’s crucial that they have all of the information about ways they can build a stronger financial future for themselves and their loved ones.
It’s important to note that the issue isn’t that women are uninterested in the topic. The misconceptions noted above exist despite the fact that women place high value on financial products that can provide benefits available through permanent life insurance. When asked what they find valuable in financial products, 83 percent of women said one that “provides a source of tax-free income in retirement,” followed by 77 percent who value one that “provides tax-free money for family/loved ones” and 50 percent who want a product that “provides the ability to use the funds to pay for college.”
While life insurance is not a college funding vehicle and does not provide a source of guaranteed income in retirement, it does provide the opportunity to build accumulation value. Any cash value in a life insurance policy can be accessed through policy loans and withdrawals income-tax-free1 that can help supplement retirement income or complement a college funding strategy.
Clearly there is an appetite for products that can help solve for multiple issues, but financial professionals need to make a greater effort to communicate with their clients—especially women—and truly explore all available options. This means working with women to understand their distinct financial challenges and the different ways that financial professionals can help provide both protection and opportunity to their client’s long term financial strategy.
FIUL as an Option
The good news is that recent innovations have opened the door for greater understanding and acceptance of index products, including fixed index universal life insurance (FIUL). As a reminder, FIUL is a permanent life insurance policy that allows for an opportunity to build accumulation value based on positive changes in an external market index or a fixed interest allocation. There is also a built-in annual floor that ensures the accumulation value will not decrease due to market volatility as the policy is not directly invested in the market2 (although certain fees and expenses will reduce policy values).
More than nine in 10 of respondents in the 2019 Life Insurance Needs Study said the ability to save enough to retire comfortably is important when planning for their financial future. Now, more than ever, Americans need a diverse mix of financial products to help them achieve that goal and the financial services industry must do more to educate all clients about their options.
For clients that need death benefit protection, but also want the opportunity for increased flexibility for their finances as well as potential tax advantages, FIUL is a viable solution. It’s clear that the financial planning community has an excellent opportunity to educate their female clients about the living and tax benefits of permanent life insurance. Providing this information can demonstrate a more complete understanding of female clients’ needs and the potential solutions that might help those clients achieve their financial goals.
Allianz Life Insurance Company of North America offers insurance and annuities in all states except New York. In New York, products are issued by Allianz Life Insurance Company of New York.
*Allianz Life Insurance Company of North America conducted an online survey, the 2018 Life Insurance Needs Study, in January 2018 with 803 respondents age 35-60, having an annual household income of $100K+.
**Allianz Life Insurance Company of North America conducted an online survey, the 2019 Life Insurance Needs Study, in March 2019 with 803 respondents age 35-60, having an annual household income of $100K+.
1. Policy loans and withdrawals will reduce available cash values and death benefits, and may cause the policy to lapse or affect any guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. If a policy is a modified endowment contract (MEC), policy loans and withdrawals will be taxable as ordinary income to the extent there are earnings in the policy. If any of these features are exercised prior to age 59½ on a MEC, a 10 percent federal additional tax may be imposed. Tax laws are subject to change. You should consult a tax professional.
2. Although an external index may affect the interest credited, the policy does not directly participate in any equity or fixed income investments. Your clients are not buying shares in an index.