“Forty percent of all consumers own life insurance to supplement retirement income” -LIMRA (2016)

Financial Planning for Young Adults

In today’s market more young consumers are showing more interest in financial planning techniques and products that may provide them with a stable income stream once they reach their retirement. The biggest challenge for people in retirement is recreating the income stream they had throughout their working career. According to recent studies, more and more younger generations are beginning to share that sentiment.

Life Insurance Options

Research has shown that consumers under age 40 would prefer life insurance products that may be able to provide a supplemental income during their retirement, rather than products that focus on just a death benefit, according to a 2016 study by the Life Insurance Market Research Association (LIMRA)1 .

LIMRA’s study, titled “Could Product Design be a Driver of Growth?,” found more than 40 percent of consumers under age 40 would prefer a monthly income benefit from their insurance product, while about 30 percent favored a lump sum payment through their death benefit. When considering products and planning strategies, people tend to only focus on techniques that fit their current financial situation.

However, as children age, debt obligations fluctuate and income levels change, a death benefit that was once sufficient could become outdated. Consequently, 7 in 10 respondents to LIMRA’s study also expressed interest in a policy that could change with their needs.

This research suggests flexible insurance products that allow policyholders to make periodic cash withdrawals, such as an indexed universal life (IUL) policy, would have strong appeal among young and middle-class consumers. With this in mind, agents who primarily consider IUL products may reach this target market more effectively than those who generally deal with a term or guaranteed universal life (GUL) products.

Indexed Universal Life Policy 

Based on current research, an IUL product appears to be the perfect match for young adults who are planning their financial future. An IUL policy provides death benefit protection that is potential income tax-free to the beneficiaries. In addition, this vehicle can be used to accumulate tax-deferred cash that may be used to supplement retirement dollars. Unlike an IRA or 401(k), there are no limitations on the amount a policyholder can contribute annually to their IUL. As a result, the IUL can have a high starting cash-value based on what they contribute to the policy. Even better, policyholders can have access to their cash value at any age, anytime, for any reason, without paying taxes or penalties.

IUL products also offer flexibility that can’t be found in other life insurance products. Adjustable premiums allow policyholders to maximize the amount of money accumulated in their policy, as there is usually no limit* as to how much they can contribute towards the cash value. Additionally, policyholders have the ability to reduce or increase their death benefit, as well as pay premiums at any time and in any amount (subject to certain limits) after their first premium payment has been made. Should the needs of the owner change throughout the life of the policy, they have the ability to increase their coverage and the freedom to temporarily stop premium payments if cash liquidity becomes an issue.

As you may already know, IUL policies are tied to a specific stock index, such as the S&P 500, and provide returns based on market performance. Once the cash value has built up to a substantial level, the client can begin taking tax-free withdrawals, and or loans, for purposes such as supplemental retirement income. Only the premiums that are not used towards life insurance coverage are used to build tax-deferred cash value. And since permanent life insurance is used for a death benefit, as well as a cash accumulation tool, the owner’s age and overall health can have a huge impact on premium costs, which would ultimately hurt the accumulation.

However, the added death benefit of life insurance pays tax-free dollars to the designated beneficiaries should the owner die prematurely. Although life insurance can generate a considerable amount of cash value, this product must be properly funded by the owner in order for it to perform as intended. Allowing the policy to lapse can actually leave the policyholder with a large tax bill, so the owner should be advised that this is a long-term planning strategy with potentially significant penalties if the policy is surrendered or lapses. Ultimately, a person who wants to invest this product should consider all their options and seek the advice of an independent financial or insurance professional to decide which method is right for their personal situation.

1. Retrieved from: (http://www.limra.com/Posts/PR/News_Releases/Younger_Consumers_Favor_Income_Stream_Over_Lump_Sum_Life_Insurance_Benefits.aspx)

2. Retrieved from: (http://www.limra.com/Posts/PR/News_Releases/Younger_Consumers_Favor_Income_Stream_Over_Lump_Sum_Life_Insurance_Benefits.aspx)

3. There may be limits based on IRS code sec. 7702 & 7702A. You should consult your tax advisor.*