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Choose Indexed LifeIndexed universal life plans define performance's floorDo you have clients who might feel variable life insurance is too risky, but traditional fixed insurance doesn't have enough growth potential? Perhaps they should consider indexed universal life insurance products, a fairly recent addition to the marketplace. By definition, indexed life insurance is a fixed life policy, yet it offers clients an alternative to fixed and variable life policies. Indexed life insurance offers at least one interest crediting option tied to the average performance of a group of stocks or bonds. A traditional fixed interest option is usually offered, too. Stock or equity indexes are most commonly used, with the Standard & Poor's 500 Index being a popular choice. With indexed life, interest is paid to a policy's cash value based on how a specified index performed over a set period, called an index segment. The downside market risk generally falls to the insurance company, not the contract owner. Indexed life can provide clients--particularly those who may have some risk aversion--with the opportunity to earn a higher interest crediting rate, compounded over a reasonable time frame, than may be available with a traditional, fixed policy. Companies may create indexed segments quarterly or annually; interest segments also can be longer than one year. In some years, the interest credited may be zero, so the policy retains some of the same volatility issues present in a variable product. Indexed interest crediting rates are subject to a cap or maximum rate of interest. If growth of the index is higher than the cap percentage, the cap rate will be credited. Most companies create policies that allow for the cap to be reset each time a new index segment is created. For example, if a cap is 17% and the index has a 20% return, the amount of interest credited is 17%. By contrast, if that cap is 17% and the index has a negative return (-10%), the interest credited is zero percent. Indexed life provides minimum guarantees with some of the upside potential of an index for the accumulation value. It will appeal to clients who don't want the risks of variable life, but want more potential for their accumulation value than is offered with traditional fixed life products. Here are profiles of variable life clients who may choose indexed life:
Traditional fixed life clients who may benefit from indexed universal life could include those unsatisfied with a low, fixed-rate environment. Other target clients may be those willing to give up some guarantees in exchange for the potential to earn higher interest rates on their cash value, yet have the option of a guaranteed death benefit. Life insurance policy values and death benefits are subject to the claims-paying ability of the company that issues the policy. Policy loans and withdrawals may create an adverse tax result in the event of a lapse or policy surrender, and will reduce both the cash value and death benefit. Given the uncertainty of our economy in recent months, indexed life insurance could be a solution that works today for a wide variety of clients. Written by Constance R. O'Brien (Manager of Life Promotions for Minnesota Life Insurance Co., an affiliate of Securian Financial Group Inc. She can be reached at constance.o'brien@securian.com.)
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