You like so much about Indexed Universal Life insurance:
• Low cost universal life chassis
• Ability to earn interest based upon an external index like the S&P 500®
• Interest credits that are locked in regardless of what happens to the index in the future
• Access to the cash value in your contract on favorable terms
• Tax-free death benefit ideal for passing wealth directly to next generation (outside of probate)
On the other hand, there are a couple of non-guaranteed elements in many IUL contracts that make you nervous:
• What if the underlying index underperforms for a sustained period of time resulting in lower interest crediting?
• What if the life insurance company “screws me*” (that’s a client term; not a technical term) and changes the interest crediting for the worse or raises the current insurance charges?
• Or said differently maybe you just like guarantees
Several carriers have developed an answer for that. It is an IUL with a lifetime death benefit guarantee. Conceptually it works just like a normal IUL except that if you make a contractually specified minimum payment you get a lifetime death benefit guarantee. The major tradeoff (everything has tradeoffs, there’s no free lunch with anything you are considering) is if you make withdrawals or borrow against your cash value, the guarantee is voided.
These contracts can also be designed in a way such that you can specify how long you want to pay (1 year, 5 years, 20 years, until your target retirement date, whatever you want).
So who is this ideal for? The typical client is someone that likes the upside cash value accumulation potential of an IUL but has a primary objective of a guaranteed death benefit at a cost efficient, guaranteed price.
Who isn’t a good fit for this strategy? Clients that want to massively overfund IULs with the intent of regularly accessing cash. These individuals should stick with the traditional IULs designed for cash value accumulation.
What about cost? Here’s what clients have told me: “Wow, that’s much better than the whole life policy is was looking at!” and, “I thought I was going to be stuck buying a term policy because it was all I could afford but this isn’t that much more.”
So, if you were looking for permanent life insurance but didn’t think you could afford it at your age or the lack of guarantees in traditional IULs scared you off, let’s talk. An IUL with a guaranteed death benefit might be a fit for your situation.
Pro tip: These policies are particularly attractive for clients with cash value in existing, higher cost policies (1035 exchanges).
*Finally a word on “the carrier is going to screw me!” – Reputable carriers aren’t going to “screw you” and this underscores the need to deal with highly rated carriers with strong reputations for renewal rate integrity. If they “screwed you” they would have trouble ever effectively marketing (or getting an independent salesforce to market) a similar product in the future. Let’s face it though, some clients have a general mistrust of financial institutions. Add to that IULs are more complex than other alternatives with which they may be familiar. It is what it is, at least perception-wise. I suggest to clients with the “the carrier is going to screw me” outlook that a traditional IUL probably isn’t for them. An IUL with a death benefit guarantee might be a good fit for this person, though.