High-Income Earners Are Drawn To IUL
March 25, 2015 by Tim Grant, Pittsburgh Post-Gazette
March 24–High-income earners shopping for permanent life insurance are being drawn to indexed universal life insurance, a relatively new type of policy that has a defined death benefit, yet also allows its cash value to reap the rewards of the growth in the S&P 500.
“Most people who buy this product look to do a couple of things — protect their assets with a death benefit and use the accumulation of the cash value to help supplement their retirement,” said Tommy Aiken, president of life distribution at AMZ Financial in Des Moines, Iowa. “And the cash value can be pulled out by the policy owner tax-free.”
Traditional universal life policies are flexible-premium contracts that credit the cash value with current interest rates and deduct mortality and expense charges.
Indexed universal life policies are linked to an index, such as the S&P 500, but place limits on the gains and, more importantly, the losses.
For example, an insurance company’s actuaries may put a cap of 13 percent on the cash value portion of policy, which means even if the S&P 500 rises 20 percent in a year, the policy owner will only get a 13 percent return on the cash value of the policy. However, if the S&P fell 30 percent, the policyholder loses no principal in the insurance policy.
Indexed universal life insurance is the fastest-growing segment of the life insurance industry in terms of new customers purchasing policies and new products being offered by insurance carriers, said Nick Perry, co-owner of the Independent Life Insurance Agent Association in Atlanta.
“In the past five years, there have been more indexed universal life products brought into the market than any other permanent life insurance products brought into the market in the last 20 years,” Mr. Perry said. “With other products, you simply pay your premium and that’s it. But with indexed universal life policies, you have more control over how the money inside your policy is used and how it works for you.”
Sales data were not available, but the insurance and financial services trade organization LIMRA said the product has been a bright spot in the industry for several years. “In 2014, indexed universal life policies saw double digit growth,” a spokesman said in a prepared statement, “which it has achieved in all but two quarters since the economic downturn in 2008.”
The growing popularity of such policies has a lot to do with the ways they have evolved over the years.
When the policies first came on the scene in the late 1990s, they were marketed mainly to people who had $100,000 to $1 million to invest. But the policies are now accessible to people in any income bracket.
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“They have flexible premiums,” Mr. Perry said, adding that an individual can start one with contributions of $50 to $100 a month. “You could pay less early on. Then later you could start putting additional cash into it and bump up the amount of cash value.”
“People making less can use this,” Mr. Aiken said. “But typically you have to have enough to fund these products, and someone making $100,000-plus is the ideal customer.”
The ideal age for people purchasing an indexed universal life policy is between 35 and 55, according to Mr. Aiken, because the policy owners need to let the money grow for 10 to 15 years to accumulate enough to draw money out.
Tim Grant: tgrant@post-gazette.com or 412-263-1591.
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