Why Buy Term and Invest the Difference doesn't always work!
The Case For Cash Value Life Insurance
Universal Life - Cash Values are credited an interest rate set by the insurance company. The rate is based off of the general account of the insurance company. These returns are generally based on corporate bond returns and mortgages. Historically these returns are in the 5-7% range, but today, the rates are in the 4-5 % range.
Variable Universal Life - Cash Values are 'invested' in separate accounts which are similar to mutual funds. These funds range from conservative bond funds up to aggressive small cap growth funds. There is much more upside potential, however, there can also be losses as well.
Indexed Universal Life - Cash Values are credited interest based on the performance of an index. The S & P 500 is the most common index used. The crediting rate will match the S & P on a 1 year point to point bases subject to a cap or maximum rate and a floor or minimum rate. Caps are currently in the 8.5% - 10% range, with floors typically 0-1%.
Challenges with Selling Cash Value Life Insurance
Comparing today's IUL Contracts
A multiplier takes the return credited off of an index and increases it by a factor. For example: 50% multiplier with a cap of 10%; the cost of the multiplier is 4%.If the market goes up 11%, you would be credited 15% (10% Cap + 50% Multiplier = 15%). These multipliers come at a cost. The costs vary, but can be as high as 7-8% of cash value.The impact to the illustration is that it allows you to show higher returns than AG49 will allow otherwise. The problem with the multipliers is that they hide the risk. Since the multipliers are typically paid for by an asset charge, in the event the markets are negative, your floor is no longer zero. In the above example, on a down year, your floor is no longer 0, it would be (-4%).
Base cost of insurance - total charges not counting the cost of multipliers.
Cost of Multiplier - specific or implied charge to buy additional return.
Caps, Floor, Multiplier - will determine the actual interest credited to your policy.
What does this all mean for you and your clients?
Cash value grows on a tax deferred basis
You can access the cash values at any time, without incurring tax
Death benefits are income tax free (estate tax free if structured correctly)
Provide supplemental tax free retirement income
Not subject to creditors
Upside gains tied to the market (subject to a Cap)
Downside protection when the markets drop (beware of cost of multipliers)
About Advisors Resource
Life insurance is a powerful tool that when used properly can improve and protect your client’s financial situation.
Your clients deserve honest advice regarding their existing policies or even policies they need to protect their family or business.
Our mission is to provide trusted advisors with unbiased information and advice regarding life insurance in order to better serve their clients’ needs.
Life insurance may not be your area of expertise. You may want a resource dedicated to your clients’ specific goals and concerns.
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