By Boyce F. Lowery, CLU, ChFC
We recently experienced the worst week for the stock market since 2008. (1) Both the Dow Jones Industrial Average and the S&P 500 posted their greatest one-week decline since 2008. The novel coronavirus has become a global fear and is wreaking havoc on stock markets and investors all over the world.
Investors are frantically searching for safer investments. The 10-year Treasury yield has dipped below 0.70% yield for the first time ever as investors flooded the market as an escape from equities. (2) Other bonds are also up, (3) as they are another alternative that investors often turn to when stocks are not performing as desired.
There are other options available beyond just bonds and Treasury notes. Both indexed universal life insurance and indexed fixed annuities share some of the market’s upside potential with no downside market risk. However, a word of caution. Though fixed index annuities and life insurance can provide a safe haven from downside market risks, these contracts are generally not designed as short-term places to park money. That said, there are products in the marketplace, when properly designed, that can provide reasonable returns over time while also providing safety from the gyrations of the markets.
What is Indexed Universal Life Insurance?
Indexed universal life insurance, or IUL, is a type of cash value life insurance. It not only provides an income tax-free death benefit but allows for the accumulation of cash in a tax advantaged manner as well. Depending on how a policy is designed, this cash value could be paid to the beneficiary in addition to the face amount of the policy when the insured dies. The cash value grows with time and the policyholder has the right to make withdrawals or to borrow funds from the insurance company using the cash value in the policy as collateral. If you are not familiar, you likely would be quite surprised at the effectiveness of this financial vehicle for retirement and other long-term financial needs, when properly structured.
IUL is called “indexed” because it is tied to one or more indices, such as the S&P 500, Dow Jones, Euro Stoxx 50, Russell 2000 and many more. Some insurance companies also offer one or more blended index accounts as well. As an indexed linked policy, interest is credited to the cash value account based on the performance of the underlying index or multiple indices chosen over a set timeframe, which typically is a 12-month period referred to as annual point to point. So, when the underlying index goes up in a 12-month period, your policy is credited with the percentage gained by the index as interest earned, but only up to the “cap rate”. These cap rates vary from time to time and will vary from insurance company to insurance company as well as the index or indices chosen. Cap rates are just one of the many material facts that must be understood to find the indexed universal life plan with the most long-term value for a given policy owner. Unlike funds invested in the markets, IUL policies come with a minimum interest rate guarantee which is called the “floor rate”. With most companies, the floor rate is 0% though there are companies that have a floor rate of 1% or 2%. When the floor rate is higher than 0%, the cap rates are then typically lower than they otherwise would be. Regardless, unlike market investments, you are guaranteed to never have a market loss because of the guaranteed minimum floor rate.
IUL policies are very flexible because they don’t have a fixed premium. You, as the policyowner, determine the amount and frequency of payments. You can pay more into the policy, subject to IRS limitations, and build up your cash value faster. Or you can pay less if you’re going through a season of tighter cash flow. IUL policies are a flexible way to share in the upside of the markets without the downside risks. It is strongly recommended that IUL policies be funded to the maximum allowed by IRS regulations to enhance the efficiency and underlying Internal Rate of Return. Further, if strong cash accumulation and tax-free access to that cash is desired by the policyowner during the lifetime of the insured, the policy should also be very carefully designed by an experienced professional specifically to maximize results.
What is a Fixed Indexed Annuity?
An annuity is a financial product offered by life insurance companies that can immediately, or at a later date, guarantee a set stream of income payments for one’s lifetime or for a set period of time. Fixed indexed annuities are commonly purchased to provide principal protection and tax deferred accumulation and/or to provide guaranteed income in one’s retirement years. The receipt of income can be immediate or delayed to a future date while knowing in advance what that guaranteed income will be.
A deferred fixed indexed annuity, like an indexed life insurance policy, has its growth tied to one or more market indices. The money that you pay into the annuity contract is able to participate in market gains, subject to interest rate caps, as it grows in value prior to commencing the income payments. One of the attractive benefits is that your money is never subjected to market losses while accumulating. Many fixed index annuities have an income rider that guarantees a very attractive return for future income purposes (not for surrender). Fixed indexed annuities have a guaranteed minimum value that provides downside protection against the loss of principal if the annuity is held beyond the surrender charge period. These annuities allow you to plan for retirement and take advantage of upside potential while avoiding any downside from market downturns.
How We Can Help
If you’re looking for a safe place for some of your money, then an indexed universal life insurance policy or a fixed indexed annuity might be a good option for you to consider. They both allow you the potential to earn competitive interest credits without the downside market risk. To learn more about these options and how they may fit into your overall financial plan, call us at 888-827-0146.
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the managing partner of Suncrest Advisors, he, his partner, and their associates all aim to provide financial security and peace of mind to business owners, executives and professionals, and high net-worth individuals across the United States. Along with more than four decades of experience, Boyce is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit https://suncrestadvisors.com/ or connect with Boyce on LinkedIn.