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IUL: Accumulation vs. Protection

One of the strategies discussed in the Insider’s Guide to Indexed Universal Life in the March edition of InsuranceNewsNet Magazine sparked some heated discussion from readers.

The difference in opinion formed over discussing the death benefit with clients. Josh Mellberg, president of J.D. Mellberg Financial in Tucson, advised that in certain instances or for certain clients, IUL is sold for accumulation rather than the death benefit and to bring it up only muddies the process. The article acknowledged that might be a radical approach and, in fact, some readers responded that it was unacceptable to omit the death benefit from the discussion.

The schism comes in part because IUL is a relatively new product type that is often sold differently than the typical life insurance policy.

In 2014, according to Sheryl J. Moore, president and CEO of Moore Market Intelligence, 75 percent of index life sales were into products priced primarily for cash accumulation purposes: education funding, supplemental retirement, premium financing, and other sales scenarios.

That number dipped slightly from 80 percent in 2012.

By contrast, last year only 13 percent of IUL sales were oriented toward the death benefit, but that was up from less than 1 percent in 2012. So, death benefit-oriented IUL products are on the upswing. The question is why.

“Carriers are developing death benefit-oriented IUL products because they can’t keep up with what they call the ‘arms race’ that is taking place with illustrated rates on cash accumulation products,” Moore said.

It is a race exemplified by rosy illustration scenarios, some of which skirt fantasy; and it is a race that has raised questions among state and federal regulators. New rules regarding IUL illustration scenarios could come as early as September, according to a recent agreement by the National Association of Insurance Commissioners Life Actuaries Task Force.

In many ways, the pricing models designed to favor accumulation features or the death benefit represent the battle between whether an IUL should be structured as an asset accumulation vehicle used in supplemental planning, or as a protection vehicle focused on the death benefit to provide support to families who suffered the loss of a primary breadwinner.

In every case, though, advisors said the death benefit should factor prominently in any sale of an IUL, for why buy life insurance if not for the death benefit?

“You’re selling a product to somebody, tell them what it is,” said agent Michael A. Masiello, principal of Masiello Retirement Solutions in Rochester, New York, in an interview with InsuranceNewsNet. “I think it’s irresponsible to put a client in an insurance product and not have them infinitely aware that it is an insurance product.”

Advisors have an obligation — ethical at the very least if not legal — to make sure clients are aware of the death benefit when selling a life insurance contract no matter how advantageous or valuable the other features within the IUL are.

Gabe Myers, CEO of the IUL marketing agency Peak Pro Financial in Greenwood Village, Colo., said that the death benefit is a big part of the sale. In the case of people who die before withdrawing the income, the death benefit will return more to heirs than the initial premium.

“People who go around the death benefit get into trouble,” he said.

“If someone’s out there trying to make cash value or growth the lead factor, that’s irresponsible,” said Gilbert Armour, a San Diego-based financial planner with SagePoint Financial. “But if approached as, ‘Here’s an individual situation where it makes sense and what we can do to make it more attractive,’ it can be a worthwhile avenue to pursue.”

Armour said the purpose of insurance is because somebody has dependents who would be affected by a caregiver dying too soon. To ignore the death benefit is “irresponsible because it is the primary feature of life insurance.”

Besides, he thinks there are plenty of other investment products in the marketplace that cost less than IULs or other forms of permanent life insurance. True enough.

But Mellberg of J.D. Mellberg Financial says that while there’s value in the death benefit, the death benefit comes at a cost and that cost needs to be weighed against the other features available in an IUL.

“The idea is that the death benefit is a great benefit but what we want to promote is to avoid structuring IULs with more death benefit then what meets the client’s protection and estate liquidity needs, because doing so results in the lowest cost of insurance and the greatest growth of cash value,” Mellberg said.

Mellberg said he tries to focus on the cash value accumulation and keeping the cost of insurance low.

“If we focus only on the death benefit, then many people won’t even give us an opportunity to show them the value of the product,” he said. “The death benefit is definitely valuable but it’s also about focusing on efficiently managing the cost of insurance and the resulting benefit of much higher potential for cash value growth.”

Whatever the strategy of the advisor, IUL sales have been on a hot streak lately.

Indexed life sales for the fourth quarter 2014 were $498 million, an increase of 24 percent compared to the year-ago period, according to Wink’s Sales & Market Report. Fourth quarter indexed life sales were up nearly 34 percent compared with the previous quarter, Wink reported.

Separately, LIMRA’s Individual Life Insurance Sales Summary Report shows that IUL premium market share has grown to 52 percent of universal life premium, an increase from only 15 percent of universal life sales in 2009.

Locked in a ferocious battle for clients and capital against banks and mutual funds, and struggling with low interest rates to boot, insurance carriers are doing all they can to spruce up their products by piling on features and riders.

Moore said that many distributors are focused on IUL sales where cash comes out of the policy because index life offers advantageous loan features.

“People are saying I need some cash and I don’t know if I can go to the bank, but you’re telling me my index life has an option for me to access the cash; tell me more about it,” she said. “It’s a unique feature of index life that consumers don’t know about.”

But the question that Masiello wonders about is whether life insurance carriers and distributors have sometimes gotten too “sexy and complicated” for their own good. “People think they’ve bought a Mercedes when they bought a bicycle,” he said.

Moore said some agents won’t even sell cash accumulation at all, preferring only to sell term life or no-lapse guarantee universal life.

For financial planner Brian Kuhn, a planner with PSG in Fulton, Md., IULs fulfill both ends of the needs spectrum.

Kuhn, who serves the middle market, said one of his clients is executing a no-lapse IUL. The contract states that there’s no guarantee of an existence of cash value; only the death benefit is guaranteed so long as premiums are paid on time.

Another client, though, is in the midst of applying for a policy that is comparatively small, and in which the money the client put into the policy is more than is necessary so that the cash value can potentially grow based on indexing, he said.

“They are both insurance products and both clients are made aware that it is insurance, but the goals are on the opposite ends of the spectrum,” Kuhn said.


Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected] [email protected].

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