Not long ago, a middle-market couple told life insurance agent Michael T. Tierney that they wanted to discuss retirement income. “Right off the bat, they said they have never bought life insurance and they will not buy an annuity or life insurance,” said Tierney, who does college funding through his College Tuition Coaches firm in Feasterville, Pa., but who also addresses retirement and other needs.
The more Tierney learned about the couple’s assets and income needs, he said, the more he saw that indexed universal life (IUL) insurance might be something they would like and need. IUL is fixed permanent life insurance that offers upside potential by linking its interest crediting to performance of one or more financial indexes as well as downside protection (a zero percent floor).
It turned out he was right. The couple got “excited” about the product’s tax-free loan capability, the upside/downside characteristic, the flexibility to accelerate the death benefit or not, and other features. They were so excited, in fact, that “they purchased an IUL on the husband. Then they came back and started looking at a second-to-die IUL policy too.”
The Mid-Market Magic
Tierney told InsuranceNewsNet that this is just one example of how well today’s modern IULs can meet middle-market (mid-market) needs and preferences.
For this article, the mid-market refers to individuals and couples earning $50,000 to $90,000 a year, depending on geographic region, family size, occupation and other variables. It also includes small-business owners who have up to 25 employees, a home, family and all the other financial responsibilities of people in the middle stages of life.
That this market is buying IUL may come as a surprise to some life insurance producers, who view IUL as a high net worth solution due to its index linking, riders, associated tax strategies and other more sophisticated characteristics.
Tierney disagrees. The modern IUL is better suited to the mid-market than to the high net worth market because it is so flexible, he said, and the access to emergency cash through policy loans is just one example. “The high net worth market has money everywhere, so it’s not a must-have issue for them. But that’s not the case in the mid-market; these consumers really need that feature,” he said.
The built-in riders that accelerate the death benefit for chronic illness, long-term care or other medical exposures are also very important in the mid-market, Tierney said. “Unlike high net worth individuals, mid-market customers may not have stand-alone policies that cover those expenses, but if they have an IUL with that rider, at least they have some protection.”
Other industry professionals have been predicting that mid-market consumers will not cotton to IUL because it is less well-known and less widely sold than term and whole life and it is too complex for these buyers to understand or incorporate.
But demographics paint a different picture. Industry data suggest that consumers are definitely buying IUL ($1.4 billion in sales in 2013, according to Wink) and that a lot of the buyers appear to be mid-market. For instance:
» Average age: In first quarter 2014, the average age of all IUL buyers was a very mid-market 41. That’s based on the 51 carriers that Wink surveyed for the quarter. In the 40 to 45 age range, buyers tend to have assets over $200,000, noted Sheryl Moore, president and CEO of Wink. Another survey, by Milliman, found a similar trend among the 26 carriers it surveyed in the first nine months of 2013. The weighted average age, including all distribution channels, was 45 (based on face amount) and 53 (based on premium) in the first nine months of IUL sales in 2013, Milliman said. “The younger folks are looking for face amount,” commented Sue Saip, a consulting actuary at the Bannockburn, Ill., firm.
» Average premium: IUL’s average target annual premium ranged from $8,000 to $10,000 in the first quarter, according to Moore. As for the first nine months of 2013, Milliman put the average premium per policy somewhat higher, at $12,000; that was on sales of “accumulation IULs,” which are designed to build high early cash values and have been the leading IUL seller in recent years. With those premium ranges in mind, the premium works out to be roughly $660 to $1,000 a month; this is considered doable for many employed mid-market buyers.
» Average face amount: Milliman puts the average face amount at $463,000 in 2013. Wink’s figure for first quarter came close to that, at nearly $430,000. Assuming the face amounts represent the recommended five to eight times salary, these averages suggest mid-market buyers are definitely in the mix.
Once mid-market individuals learn about IUL, they get seriously interested, said sources interviewed for this article. The trend is especially evident in the market’s middle- and higher-earning segments. Following are some insights on this, including some revealing case histories (highlight only, for the sake of brevity).
Death Benefit, Flexibility and More
Terry Headley, president of Headley Financial Group, La Vista, Neb., and a former president of National Association of Insurance and Financial Advisors (NAIFA), said the attractions for the individual are the ability to purchase a low-cost death benefit, the flexibility in premium and death benefit (due to the universal life chassis), and the downside floor/upside potential.
The premium flexibility is “good for times when there may be job uncertainty,” he said. He also likes the built-in cost-of-living rider on the IULs he sells. This offers automatic increases in face amount without proof of insurability, subject to an increase in premium. (If the owner rejects an increase, no more increases will be offered in future years.)
Case history of a teacher: “The husband was a teacher earning $40,000 to $50,000 a year, and the wife was a lab tech earning $40,000. They had kids in high school. When evaluating the death benefit need at the eight to 10 times earnings test, we determined the couple would need a combined face amount of $900,000 for the two of them. We chose an 80 percent replacement rate, putting $400,000 on the husband and $320,000 on the wife. After examining the budget and other factors, the decision was that $200,000 of that face amount would be in an IUL written on the husband and $120,000 in an IUL on the wife; each would also have $200,000 of convertible term insurance. This ensures that they have some permanent insurance, and the flexibility to upgrade the IUL for part of the retirement income portfolio later on.” — Terry Headley
For small-business owners, who are often in the higher end of the mid-
market, the IUL is effective for executive bonus plans, key person insurance, buy-sell funding in closely held firms and deferred compensation arrangements, said Headley.
Some people may not consider people with small businesses to be part of the mid-market, Headley allowed. However, many are just that. He pointed to a young family in which the parents are professionals in their late 30s – the husband an attorney and the wife an accountant/bookkeeper – with an annual income of around $130,000.
The couple has three children and one on the way. “Our analysis showed they needed $1.5 million of life insurance. For each, we put three-fourths of the face amount in convertible term insurance and one-fourth in IUL. We funded it at a level to fit their monthly cash flow but with the ability to increase the funding in the IUL,” Headley said.
Later, the parents will be able to use the IUL to withdraw funds for the children’s college education, “as a ‘secondary bucket’ to the 529 plans,” he said.
The couple might also use their IUL to supplement retirement income, he added. It’s a good product for that, he said, because the cash value grows tax deferred and the policyowners can access funds tax-free through policy loans. The clients do need to make sure the loans do not result in policy lapse, thus triggering unwanted taxes, he said. But he added that the IULs he sells include a life paid-up rider, which essentially “ensures that the contract will mature with a death benefit and not lapse or collapse.” This assumes the policy is not structured as a modified endowment contract and does not breach the annual guideline premium test, Headley said.
College education funding is a common use of the IUL in the mid-market for families, said Wink’s Moore. This includes using IUL to fund the education of not only one’s children but also one’s grandchildren.
“Some grandmas are being pitched on this when the children are very young,” she noted. “In this strategy, Grandma pays the premiums and overfunds the IUL. The premium is so low, due to the young ages of the children, this overfunding is easy to do.”
If Grandma makes the IUL purchase when the children are young, the cash value will have plenty of time to grow before college starts. That’s important, Moore said, “because you need the time factor for compounding to work, especially for cash accumulation and when the intention is to take policy loans later on.”
The IUL is a good alternative to 529 college education savings plans, said Tierney, because of the tax-free growth, the tax-free access to funds via policy loans, and the annual reset that locks in gains.
Mid-market parents are also interested in another aspect of using life insurance for college funding purposes, he said: Life insurance policies – like retirement accounts and annuities – do not show up on student loan applications. Tierney explained, “That means the parents will have more money available for student loans and less money out of pocket for college tuition.” That’s important because if the parents take money out of pocket for college funding, they are potentially taking funds from their retirement future, he said.
Avoid Loss Due to Market Downturns
Lew Nason, a marketing and sales trainer at Insurance Pro Shop in Dallas, Ga., says mid-market customers like IUL because it offers the potential to get a better return than from other fixed products, and without experiencing exposure to losses in the stock market.
Oftentimes mid-market customers in this market have already lost money from investing in securities. “They may still believe they can make more money in the stock market, but they don’t want any more losses,” he said. When that is the case, the IUL’s flexibility and various
policy features take a back seat to the product’s upside potential/downside protection capabilities, the cash value buildup that can occur and the death benefit.
Agents need to sell what they are more comfortable with, Nason allowed. If they are independent agents who started out in the career agency system, they might be more comfortable selling whole life to such customers because of its guarantees, he said. But once they are in a competitive situation, “they often become enamored of IUL due to its total cash value or tax-free income.”
Case history of a young family: “When I was a brokerage general agent (BGA), I went with another agent to visit a schoolteacher. She and her husband were in their 30s, had two little girls and wanted health insurance, but they didn’t want life insurance. She said she had bought 20-year term insurance from her agent/mother a few months previous – $250,000 on her and $500,000 on her husband, for a total premium of $1,000 a year. She said they were tired of losing money in the stock market but still wanted to save so were planning to put about $2,000 a year into a Roth IRA. I came back with an apples-to-apples recommendation. Why not purchase an IUL on the husband for $300,000 plus two riders – a $200,000 20-year term rider on him and a $250,000 20-year spousal term rider on her? The total premium would be $3,000 a year, the same as that for the term/Roth plan they were considering. The term insurance on both would expire at the end of 20 years, as now. But the IUL on the husband would have face amount of $344,000 in 20 years, assuming they made no changes to the contract. In addition, at 6.5 percent annual growth, the policy would have a total cash value of around $87,000 (as opposed to a projected Roth value of $69,000, assuming 5 percent growth). They liked it and bought it. Then, three weeks later, the teacher decided to convert her spousal rider to a $250,000 IUL, using some existing assets to fund the new policy. She said she didn’t want to lose her life insurance after 20 years.” — Lew Nason
Address Survivorship Issues
Mary Ann Lacey-Gray thinks IUL works well for survivorship needs in the mid-market. The president of Underwriters Marketing Service, a Mount Laurel, N.J., national marketing organization, she said her firm has been marketing IUL for about 10 years. This experience has convinced her that the product is a good fit for people in their mid-30s on through age 70, as long as there is a timeline of 10 years or more.
For mid-market people in their 60s, she said, the appeal is the potential cash value buildup from the index linking for use in case there is a future need for money. In addition, she said, there are survivorship IULs on the market that appeal to couples in this age bracket. They like that they can use the cash value in such policies for tax-free loans as well as a tax-free death benefit, she said.
“What gets their attention is the loss avoidance. People are squeamish about money, and they want it protected. They like the sleep-at-night feeling about their supplemental dollars along with the death benefit and waiver of premium.” For older people, she said, it comes down to this: “They like that there is no risk of loss in the cash accumulation, that there is predictable gain through guaranteed growth, plus survivor coverage.”
Many also like the included critical illness rider, Lacey-Gray added, noting that this takes care of the “What if I have a diagnosis of cancer or stroke?” question (by providing a lump sum via death benefit acceleration).
Case history of an older couple: “A couple, both age 65 and rated standard, can buy a survivorship IUL with a $500,000 face amount for a premium of $500 a month, or $6,000 a year. Assuming an interest rate of 6.40 percent, which I consider to be conservative based on historical performance, the policy will take them to age 95 with death benefit sustained. But if they want to surrender the contract, after 15 years, for example, when they are age 80, they would get $102,000 after surrender charges (which run for 20 years but are small by that time). That amount brings them close to the premium they will have paid in up to that time. If assuming guaranteed values, which are 3 percent on the contract I am thinking of, the death benefit would go for 17 years, to their age 82. In addition, the policy includes death benefit acceleration rider for long-term care, critical illness, chronic illness and terminal illness.” — Mary Ann Lacey-Gray
Retirement and Social Security
Michelle Ford, CEO of LifeLong Retirement Corp., Bridgewater, N.J., sees a sweet spot for IUL with clients who are approaching retirement and interested in Social Security strategies.
Many of these clients are “the millionaire next door,” she said. These are the people who have worked and saved to get to $1 million or close to it. Now they want to learn how to take income in retirement, maximize their Social Security benefits and minimize their taxes.
Because they are no longer young, she said she makes sure to use conservative assumptions in structuring the IUL, which becomes the basis for tax-free money in retirement. Her planning approach also includes Social Security claiming strategy and positioning other assets with taxes in mind. The objective is to create “a coordinated, cohesive plan that the client has the ability to understand” and that provides reassurance that “there is no need to worry about what happens in the stock market.”
In general, Ford said, she prefers to use IUL rather than variable universal life with such clients. “We need to stay as realistic as possible,” she explained, and also to avoid the potential for the life insurance to fail in the event of a down market.
“IUL offers an opportunity to have enough juice for the engine,” she added. “Due to the way the chassis works (a universal life contract that credits interest based on linking to gains in an index) and its annual reset concept (on credited interest), the IUL allows the assumptions to come as close to fruition as possible.”
Case history of a divorced man: “A divorced 57-year-old man thought he probably couldn’t retire until age 70. He was earning $95,000 a year, had $550,000 in assets (qualified and nonqualified), was the father of two daughters, and had a significant other with whom he did not co-mingle assets. He did have some whole life insurance, but it was less than he thought. We set up a retirement plan that includes IUL and Social Security claiming strategy. He will retire at 62. Then, at age 66 and two months, he will take 50 percent of his ex’s Social Security. At age 70, he will switch to taking his own (maximum) Social Security ($39,000 a year), thus maximizing his benefit. Upon his death, the two daughters will split his 401(k) assets and the significant other will receive the IUL proceeds. The IUL is a five-pay $351,000 policy that was set up as life insurance (i.e., not a non modified endowment contract). The policy is funded by repositioned assets. At age 70, the man will start taking out $14,170 a year as tax-free loans from the IUL. This assumes 7 percent interest, and based on historical performance, the policy will pay out all the way through, along with his Social Security benefits and $4,800 a year from an indexed annuity in his Roth IRA. He will pay a small required minimum distribution on qualified money but will still have additional dollars left over. And should he experience a long-term care or critical illness event, the IUL will accelerate death benefit for that. In sum, this plan takes care of the beneficiaries, maximizes the Social Security benefits and puts the assets in protected instruments.” — Michelle Ford
Not for Everyone
As effective as the products can be, they are not for everyone in the mid-market, several experts say. Here are a few such instances.
Limited funds. Some mid-market consumers, such as families with young children, don’t have enough discretionary income to go into a cash-value-building policy such as IUL, said Headley. Tierney agreed, noting that a similar issue occurs when job security or family issues appear on the horizon. In some cases, Tierney offers a term life policy instead; in others, he suggests coming back later when funding is easier.
Short window. If there is too short a timeline (say, under 10 years), the advantage of compounding will not have time to work, said Lacey-Gray. “You need younger buyers so they can take advantage of the loan feature later on,” agreed Moore.
Customer preference. If the customer is looking only for a guaranteed death benefit, that’s a signal to look for other types of coverage, said Lacey-Gray.
When working with IUL in any market, producers need to be aware of concerns about the product, according to experts.
One issue is policy illustrations. The large majority of IULs are sold with illustrations, but some regulators are concerned about whether all illustrations are appropriate, said Carl Friedrich, principal and consulting actuary at Milliman.
To create the illustrations, insurers use current IUL caps (limits on interest credits) and participation rates (the percent of gain in an index). They also use look-back periods of, say, 20 to 25 years to derive an historical average on returns, Friedrich said. “The concern is, what is the appropriate look-back period? Do the periods change from year to year? How should the carriers illustrate these policies?”
This will probably lead to new actuarial guidelines in the next year or two, Friedrich predicted, saying, “That may create constraints on how attractive the products might look.”
Another illustration concern is that some of today’s illustrations may show interest crediting rates in the double digits, for example. That has “powder keg potential,” said Wink’s Moore.
Compared to the policy’s guaranteed minimum and what other types of fixed products are offering, the double-digit returns look “enticing” to customers and producers, she allowed. But if the rate doesn’t pan out, consumers will complain. Her suggestion is for producers to talk with clients about expecting interest rates that are 1 percent to 2 percent over what traditional UL policies will pay rather than setting the expectation at, say, 12 percent.
Another issue is policy structure. To ensure the tax benefits of IUL, including the tax-free policy loans, the policy needs to be set up as a nonmodified endowment contract and must not breach the guideline premium test under Section 7702 of the Internal Revenue Code, noted Headley. In addition, clients need to be made aware that the individual exemption level from federal estate taxes on life policy proceeds maxes out at $5.34 million this year, he added.
A final concern is education. “There has been a huge lack of education among producers about using policy loans in IUL,” noted Moore. That includes education not only about types of loans that are available but also about how riders, such as the “overloan” protection rider and the paid-up rider, can help protect policyowners from experiencing a potential taxable event due to loans.
Education is also needed about adequate funding levels, said Headley. This applies to education of both customers and producers. In addition, he said, even though customers may understand their policies when they are explained at the time of purchase, “they need constant re-education,” at least yearly when they get their annual statement, he said.
Where IUL Is Good
The industry’s laundry list of positives about IUL in the mid-market or any market is quite long. The policies can be written at low premium levels if necessary and maximum funded if desired. They can build up cash value over time through linking credited interest to various market indexes. They have downside protection through the interest rate floor. They allow dump-ins. They allow tax-free policy loans that work well in college funding and retirement income scenarios. Many offer death benefit acceleration for long-term care and various other exposures. The products can be sold as single life and survivorship life. They work well for families, with spouse and child riders attached, as well as for small-business owners. The list goes on.
But is IUL also attractive to producers who sell in the mid-market? Those who sell it said yes. For one thing, the IUL competition is minimal in the mid-market, giving producers plenty of opportunity to sell, they said. For another, when a competitive situation does rear its head, IUL looks very attractive in the current environment when compared to traditional universal life and many other products.
Wink CEO Moore added another producer advantage that some may not have considered. Because IUL has so many features and so much flexibility, she said, “the producer gets to be trendy by offering ‘bundling.’”