or bond mutual funds. As clients consider
where to reallocate — or supplement —
this fixed income, FIAs are a smart alternative for bonds. They have a track record
of strong performance and eliminate the
downside of the market while, at the same
time, have the ability to provide interest
beyond the current yields of bonds. As
such, FIAs are a logical addition to the
fixed income portion of a client’s asset allocation plan.
Index ULs provide clients with a death
benefit while building policy value that
can generate tax-free supplemental income later in life. This income can be used
for anything, including funding college tuition, retirement and medical expenses.
LIS: What advice do you have for advisors and agents whose clients don’t
want to stray from traditionally low-risk options, like CDs and money market funds?
Gipple: It’s understandable that clients
who aren’t familiar with index products
might want to focus on CDs and money
market funds. This, again, is where being
an educator is important. Index UL and
FIAs are arguably less risky than traditional
“safe” products, such as CDs and money
market funds. However, risk is in the eye of
the beholder. For instance, inflation can rob
these types of “safe” income-generating options of their value, and index products may
be a hedge for this inflation risk. The new
rule of 72 suggests that 72 divided by the
inflation rate indicates the number of years
before the value of your client’s money is
diminished by 50 percent. For example,
if inflation is 3 percent, a client’s $1 million will only have the buying power of
$500,000 in just 24 years. The yield on a
national five-year CD is currently averaging 79 basis points6 — not a good inflation
hedge against this serious risk.
for their clients?
Gipple: First, agents and advisors should always seek out products developed and
offered by companies they trust, with a history of delivering on commitments. Beyond
that, flexibility and diversity are incredibly important in index products. Clients are
looking for products that are flexible enough to meet changing needs and priorities
throughout their lives.
1. What Do They Know, Anyway? Consumer Understanding of Life Insurance, LIMRA 2012
2. A withdrawal may be free of federal income tax or “tax free.” If the policy is not a Modified Endowment Contract
(MEC), then, except for certain changes in the policy during the first 15 policy years (and especially during the
first five policy years) that cause cash distributions that may be taxable even if they do not exceed investment
in the contract (basis), withdrawals are not taxable to the extent that they do not exceed basis. Policy loans
are free of federal income tax when taken except if the policy is or becomes a MEC. If the policy is a MEC, a
distribution (withdrawal or policy loan, including any increase in the policy loan balance because of unpaid loan
interest) is taxable to the extent that policy value exceeds basis. A 10% penalty tax may apply to distributions
from a MEC if the policyholder is under age 59½. Basis is premium paid minus any long-term care rider charges
and minus nontaxable amounts previously recovered through policy distributions. Assignment or pledge of a
MEC as security for a loan would also be a taxable event. If the policy becomes a MEC, then any distribution
(withdrawal or policy loan) taken in the policy year in which the policy becomes a MEC and in subsequent policy
years is taxable the same as a distribution from a MEC. Any distribution taken within two years prior to the policy
becoming a MEC may also be taxable the same as a MEC. Termination, other than by reason of the insured’s
death, of a life insurance policy with a policy loan balance may be deemed a distribution of the outstanding policy
loan balance, resulting in possible adverse tax consequences for a policy that is not a MEC. Consult a tax advisor
about possible tax consequences. We are not responsible for any adverse tax consequences.
3. Sheryl J. Moore, “Fourth Quarter 2012 Indexed Insurance Sales,” sheryljmoore.com, March 18, 2013.
4. “Annuity Industry Estimates” YTD 2012, LIMRA.
5. LIMRA, US. Individual Life Insurance sales, Fourth quarter 2012
6. Bankrate.com, “National CD rates for May 9, 2013.”
LIS: What should agents and advisors be looking for in index products
Although the policy value or contract may be affected by the performance of an index, the policy or contract is not
a security and does not directly or indirectly participate in any stock, equity or similar investment including, but not
limited to, any dividend payments attributable to any such investment.