The time has come to take another look at life insurance and reevaluate the role it can play within an overall financial strategy. While term insurance certainly is important, more attention needs to be paid to the innovations happening within the industry—particularly with fixed index universal life (FIUL) insurance and the larger value it can bring in helping clients meet their overall financial goals. The new reality is that clients not only want (and need) the protection offered by life insurance, they also want the opportunity to accumulate cash while enjoying additional tax advantages. FIUL offers just that.
A new lens on life insurance
Life insurance has traditionally been viewed as a protection product. And while protection in the form of a death benefit that is generally income-tax-free to beneficiaries is no doubt a primary feature, FIUL can serve a much greater role in a financial portfolio. As a reminder, FIUL is a universal life insurance policy that allows for an opportunity to accumulate cash 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 cash value will not decrease due to market volatility as the cash value is not directly invested in the market.1 (Although certain fees and expenses will reduce cash value.)
In many cases, cash value accumulation from FIUL can provide an added layer of protection from market volatility. This accumulation opportunity helps clients to diversify their portfolio, which is particularly important when preparing for retirement. While most clients have 401(k)s or other savings investment vehicles in place, some might face limitations due to having maxed out contributions. FIUL is another arrow in the quiver, so to speak, in the effort to accumulate funds.
Emphasis on FIUL benefits
When it comes to discussing FIUL as an option with clients, there are two key features of the product that are deserving of an increased level of emphasis. Living and tax benefits are two product benefits that may be available and that help set FIUL apart as a potentially appealing option for clients.
Living advantages are all about an added layer of flexibility. Any available cash value accumulated in a FIUL policy can be withdrawn or loaned2 and used to cover unexpected expenses or to help meet a financial goal such as helping to pay for college, buying a home or supplementing retirement income. And living advantages are also age agnostic when it comes to their appeal. Young families can attain the death benefit protection that is so critical in this life stage while potentially building cash value that can be used toward both long-term and short-term goals dependent upon their specific financial needs.2 For those later in life, FIUL’s ability to allow loans and withdrawals against accumulated cash value can offer an added layer of protection that may be available if needed to help fund retirement or to help build a legacy.
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 accumulate cash value. Any cash value in a life insurance policy can be accessed through policy loans and withdrawals income-tax-free2 that can help supplement retirement income or complement a college funding strategy.
The tax advantages of FIUL can be extremely valuable and can play a significant role in developing, or redeveloping, an overall financial strategy. There are three primary tax advantages to keep in mind. First, and most widely known, is the income-tax-free death benefit. Second, is a lesser known benefit that the accumulated cash value is tax-deferred. And third, the aforementioned policy loans and withdrawals are generally not taxable.2 All have the possibility of being beneficial for clients.
While the benefits of FIUL spelled out above are hopefully noteworthy, perhaps the real story has to do with what clients want and what clients understand about the product. There is much work ahead for financial professionals, but with that comes an unprecedented opportunity. A recent study indicated that the vast majority of Americans are still unsure about the full benefits of permanent life insurance (including FIUL). Even more intriguing is that consumers are actually quite interested in these products and are undereducated about the living and tax benefits that may be available.3 Consider the following data:
- 85 percent of Americans find value in financial products that provide a source of tax-free income in retirement.
- 66 percent are unsure or don’t believe benefits paid from life insurance are not taxable.
- 51 percent are unsure or don’t believe cash value from universal life insurance can be used to help fund college education, supplement retirement income or assist with other financial needs.
All of this adds up to a great opportunity for financial professionals to better serve their clients—especially those advisors who may not have offered life insurance solutions in the past and are just beginning to embrace a holistic planning approach that addresses all aspects of their client’s financial life.
Financial professionals have an obligation to bridge what is a clear education gap with clients. The first step is to stop “playing old tapes” and take a different approach to life insurance.
With products such as FIUL, protection, accumulation potential, and flexibility come together to serve an increased role as a cornerstone of an overall financial strategy. Diversification has always been a core component of a well-balanced financial strategy and FIUL is yet another option for consideration in helping meet the overall financial needs and goals of your clients.
1 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. The index value does not include the dividends paid on the equity investments underlying any equity index and dividends are not reflected in the interest credited to the policy. Interest paid on the fixed income investments underlying any bond index, however, are reflected in the index value which impacts the interest credited to the policy.
2 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.
3. Allianz Life Insurance Company of North America conducted an online survey, the 2018 Life Insurance Needs Survey, in January 2018 with 803 respondents age 35-60, having an annual household income of $100K+.