What type of person might be considered the “target” customer for Fixed Index Universal Life (FIUL) insurance coverage? Of course, that is a difficult question to answer without more specific information about the client’s needs and goals–but this question may bring to mind a customer profile that centers on someone who is married with kids, typically in their 40s and in the middle of their higher earning years. This person has an interest in protecting their family’s finances in the event of an unexpected death, and they have the income to afford appropriate coverage.
While it’s true that this person may be a common candidate for the death benefit protection available through FIUL, this demographic isn’t the only direction financial professionals should look when recommending the benefits of FIUL coverage. Although younger, and likely having less disposable income and fewer family protection concerns, millennials are fast becoming an intriguing possibility for all areas of financial services including FIUL.
Millennials may not exactly fit what we may think of as a target customer for FIUL coverage, but they’re known for being financially savvy and having in interest in protecting their financial future–two attributes that lend themselves to receiving sound financial guidance. Whether they are risk adverse or simply see the value in saving for the future, there is great potential to connect with this demographic and have productive conversations about the many benefits FIUL can add to their long term financial plans.
Millennials Have Short and Long Term Financial Concerns
According to the 2016 LIMRA Insurance Barometer study, younger Americans showed a higher level of concern than older generations over many financial issues including paying monthly bills, supporting themselves if they became disabled and were unable to work, paying off their mortgage/rent and paying off/reducing credit card debt. This is understandable as they are in or near the family-forming years, face the burden of high student loan and credit card debt, and are further from their peak earning years.
Surprisingly, millennials were also more concerned about several financial issues that people confront later in life, such as having money available for a comfortable retirement, paying for medical expenses, paying for a child’s school/college and burdening others with funeral expenses. These responses tell us that millennials are not only thinking about short-term financial concerns–they also have their eye on the future and how they can adjust their spending/savings behavior now so they may be better prepared down the road.
Recent advances with life insurance products have helped by offering more ways for millennials to address future uncertainty with their finances. FIUL can address concerns millennials have about protecting their loved ones (even if starting a family is still a few years away) with the income-tax-free death benefit to beneficiaries, but can also provide the flexibility to help deal with other future concerns including income replacement, a college funding strategy, paying down a mortgage or other debts, estate tax coverage, final expenses and business succession.
These features are important as millennials have significant concerns about their ability to deal with the effects of rising costs as they get older. According to a new study* on Americans’ perceptions of the effects of inflation, millennials (48 percent) report being either “very concerned” (36 percent) or “terrified” (12 percent) that the rising cost of living will affect their retirement plans. Additionally, 49 percent of millennial respondents note they are either “very worried” (34 percent) or “panicked” (15 percent) that they won’t be able to afford the lifestyle they want in retirement due to rising costs.
FIUL can help address some of these concerns by providing the opportunity for the policy to build cash value accumulation from indexed or fixed interest which may be accessed for various reasons. (Keep in mind, any cash value taken from the policy is accomplished through policy loans and withdrawals. Taking policy loans and withdrawals against a life insurance policy will decrease any available cash value and death benefit. Clients should carefully manage policy values to help prevent a policy lapse and potential tax consequences of any outstanding loans.)
With the potential to help cover some of these future expenses, the issue then becomes determining an appropriate amount of life insurance coverage for younger buyers. Although they may see the value of more extensive life insurance coverage later in life, many millennials simply can’t afford the necessary premium to achieve that level of coverage on a permanent basis right now and are left with insurance that might not meet their desired needs. This is unfortunate because millennials are likely able to secure more coverage now when they are younger and may be in better health.
Thankfully, a convertible term rider–a new solution available through some FIUL contracts–can help younger clients who want to lock in insurability now, with the flexibility to adapt as their life changes. Available at an additional cost, a convertible term rider provides the opportunity to add term insurance coverage to a permanent policy–and gives the client the option to convert a portion or, over time, all of this term coverage into permanent coverage without additional underwriting. The client will maintain their desired death benefit protection, but because they are converting into an FIUL policy, they will also have the potential to accumulate cash value through the additional permanent coverage.
Flexibility for a Changing Lifestyle
Consider the example of David, a hypothetical client who is 30 years old and in good health. He’s a recent medical school graduate in his second year of residency. Since he is young and healthy, David thinks it would be an appropriate time to get life insurance protection. He anticipates a significant increase in his income when he completes his residency. In the meantime, he has modest income while making payments on student and auto loans and contributing to his retirement 401(k) plan.
David needs coverage that is affordable within his budget and provides an adequate death benefit, but would also like a strategy that can supplement his retirement savings. This convertible term rider within FIUL meets nearly half of his needs since it locks in insurability on the additional term amount now while he is young and in good health–but has flexibility to change as his lifestyle changes. Because David is on a limited budget he can’t afford the amount of permanent coverage he would like right now through the base policy alone, but through a convertible term rider he can get adequate coverage for the present while setting himself up for more extensive permanent coverage in the future.
For example, using the rider, between the two types of coverage he is able to have a $1,000,000 death benefit–with $250,000 in the base policy and $750,000 in the convertible term rider–at the lower cost in the first year of the policy.
Five years down the road, David’s financial circumstances change and his income has increased. He’s decided that he would like to increase his permanent coverage and, at the same time, increase his potential to accumulate cash value. So, in policy year six, David coverts a portion of his convertible term rider coverage into permanent coverage–which he can do without having to go through additional underwriting. In this scenario, he now has $500,000 in the base policy and $500,000 in the convertible term rider, maintaining the $1,000,000 death benefit.
In policy year nine David converts the remaining portion of the convertible term rider into permanent coverage (again without additional underwriting). He continues to have a $1,000,000 death benefit, and with his term coverage now consolidated into permanent FIUL coverage, he has the potential to continue to accumulate cash value for future needs. By utilizing the convertible term rider option with his FIUL policy, David was able to save over $35,000 in premium payments in policy years one through nine and still get the $1,000,000 life insurance coverage he needed.
Of course, it’s important for the client to realize that certain terms and conditions exist with this type of rider regarding when conversions can be made and how much can be converted each policy year–but if they understand these considerations, an FIUL policy with a convertible term rider can be an effective solution for some millennial clients.
As younger people continue to become more savvy about saving and financial planning, it’s important that the industry provides solutions that meet their needs and help them achieve their financial goals, both now and in the future. Product innovations within the life insurance industry are clearly moving us toward this new reality, helping financial professionals to create stronger, more meaningful connections with millennial clients.
*The Allianz Life 2016 Inflation Study was conducted by Ipsos via their eNation Online Omnibus in March 2016. The survey was completed via Ipsos’ iSay/Amario Panel with 1,005 U.S. adults age 18+, and was commissioned by Allianz Life.
