How do you use life insurance to balance benefits, accumulation and income; and also balance guarantees and upside potential?
We recently reviewed a presentation of how to combine Guaranteed Universal Life (GUL) with Indexed Universal Life (IUL) to provide this balance. Typically when comparing IUL to Par Whole Life (PWL) you see greater upside potential with a trade-off for lower guarantees; more flexibility with a trade-off of needing to be sure this flexibility is managed properly.
When comparing GUL to IUL or PWL, you see the lower cost of guaranteeing a death benefit with the trade-offs of limited or no cash value in GUL.
In a strategy of combining GUL with IUL we look at the potential to use a Guaranteed Refund Option (GRO) for GUL in year 15 or years 20 to 25. In this case, the GRO has a 60-day window on each policy anniversary to decide whether to use the refund. Added value in this combination case comes from having strategic options to select in or near retirement. After 15 or more years with the policies, you reassess where you are with benefit goals, IUL policy funding, and retirement income plans including Social Security timing. Here are potential strategies to follow:
- Maximize Estate – you have enough funds to max fund the IUL and continue the GUL. You do not exercise the GRO.
- Retirement Income and Guaranteed Death Benefit – you have either max funded the IUL or trimmed down the benefit of the IUL to maximize income via loans or withdrawals to basis. You use part of this income to pay the GUL premium and continue its guaranteed benefit. You do not exercise the GRO.
- Use Chronic Illness Rider on GUL – If a chronic illness occurs and the GUL is continued with this rider, then you have an option to use this benefit from the GUL and postpone or not use this benefit on IUL depending on the IUL accumulation and performance. You would look at how the IUL accounts have performed and consider the future potential.
- Fund IUL with GUL Refund – You decide to exercise the GRO and use the refund to help max fund the IUL policy. You consider current life expectancy to be sure the plan to drop the GUL benefit is an appropriate trade-off. Keep the IUL to either build the estate or supplement income. Adjust income based on performance and move to fixed accounts if and when needed to assure tax advantages.
These options add value by letting you adjust the policies for the inevitable changes in financial goals and resources, life expectancy and health, and economic returns and values. How do you plan to work with your clients to prepare them for these key decision points in balancing and using their life insurance?
Note – A Par Whole Life policy can provide similar strategies if there is a Chronic Illness benefit, sufficient growth via dividends, competitive loan rates, options for surrendering additions to provide cash and reduced paid-up options to free up cash while keeping the same dividend scale. From what we see, the dividends would not have the same upside potential as indexed accounts for IUL, but the guarantees in Whole Life may be part of an overall portfolio strategy where other assets separate from life insurance are invested with appropriate risk and return considerations.
Guarantees are backed by the financial strength and claims paying ability of the issuing insurance company.
FIG does not give tax or legal advice. Your client should consult with and rely on their own tax and legal advisors regarding their particular situation.
This is not a comprehensive overview of all the relevant features and benefits of any particular product. Be sure to review all of the material details about any products referenced in this article before making specific recommendations to clients.