benefit, there’s another type of value they can find useful — especially with respect to one specific type of universal insurance.
“A permanent life insurance policy … also offers the potential to accumulate cash value tax-deferred that can be accessed later for a variety of needs through policy loans or withdrawal,” explained Jason Wellman, senior vice president of life insurance sales for Allianz Life, in an article contributed to InsuranceNewsNet.
Zeroing in on indexed universal life policies, Wellman explained that IUL provides policyholders the flexibility to pay premiums when they want and in the amount they choose for the coverage they need. After deducting fees and charges, the premiums can potentially build cash value in the policy through different allocation options, including a fixed-interest allocation.
“The policy’s cash value has the potential to earn indexed interest based on the annual return of an external index,” he said, adding that the interest is credited to the policy every year on the policy anniversary. At that point, the interest is locked in; an external index may affect the interest credited, but the policy doesn’t directly participate in equity or fixed-income investments.
“Therefore, if the index value drops, your client loses nothing,” he said. “Once it is locked in on the policy anniversary, the cash value can never be lost due to market volatility – even if the index drops.”
Building cash value in a policy, Wellman said, is important as a potential safety net for policyholders’ various financial needs, including retirement income. While an IUL can’t provide a guaranteed, sustained stream of income, options such as policy loans and withdrawals allow it to act as a supplement to other sources such as public and private pensions.
He also noted tax advantages such as potential tax-deferred cash-value accumulation and possible income-tax-free loans and withdrawals. Another plus, he added, is the fact that life insurance isn’t subject to some of the income and age restrictions applied to many other financial vehicles. “This may give your client greater flexibility in managing their retirement income,” he said.
There are certain restrictions and factors clients must consider before accessing the cash value of their policy. The most critical to discuss with clients, according to Wellman, are:
- Their eligibility based on health and finances;
- The potential impact of their policy funding approach on how loans are taxed;
- The potential impact of policy loans and withdrawals on the policy cash value and death benefit;
- Possible unintended consequences such as policy lapse or taxable events;
- The possibility that the policy’s index is subject to market volatility to a certain extent, leading to possible earnings of 0% in any given year; and
- The fact that fees and charges will weigh on the cash value of a policy, even though it’s guaranteed to deliver a minimum interest rate and not lost value to market volatility.