Last week one of our reps got an email from a client who was very skeptical about using an EIUL policy as a supplement to retirement. In his email he said things like:
- “friends told me it is too good to be true”
- “an insurance man told me if I take loans I will be on the hook and have to pay them back”
- “how come I never heard of this before”
This is a common response. Usually this happens because the presentation did not fully explain the concept in all of its form. Or the client just heard some of the presentation and not all of it. In our training we are very specific about how to best explain “over-funding” life insurance. The why’s, the how’s, and the when’s. In our experience, if you explain it properly the client not only understands the pro’s and con’s of the concept, but they are able to explain in layman’s terms to the skeptics who wonder why they want to do it. We have another training coming up in September…this is one you don’t want to miss. For now, I thought I would share the email response we gave to the client that lead to the sale.
Dear Mr. Sinclair: Thanks for your email. As often happens with a concept or idea, the message gets lost or confused when trying to explain and the true value of the concept gets lost in the minutia. The idea of using Life Insurance as a supplement to retirement income has been around since the early 80’s. In fact, Life Insurance is often used by Fortune 500 companies as the best vehicle to fund their deferred compensation programs. With the advent of the Equity Index Life Insurance policy, we have seen the concept gain much momentum in the mainstream. The idea is a good one for the right client, the correct situation and the proper policy design.
Lets first talk about the proper policy design. If you can vision a life insurance policy as a bucket, and the idea that your premiums flow into the bucket, then you can you can have a picture of how a properly funded life policy works best. Because it is life insurance, the premiums that are in the bucket will grow “tax deferred.” This means that during the accumulation phase the money within the bucket will not be taxed. This is a key element to the life insurance as a supplement to retirement concept.
Now because this is a life insurance policy there are also costs involved. So our bucket must have a faucet that allows for the “cost of insurance” to come out of the bucket. This cost of insurance is based on a person’s age, sex, health and smoking status. The younger and healthier a person is the lower the costs. So a proper design will try to keep the cost of insurance as low as possible. We do this by keeping the Face Amount (or death benefit) as low as possible. This is different from the typical life insurance design in that most times we want the most face amount for the least amount of premium. In this concept, we do the opposite. We want the least amount of benefit for the most premium so more money stays in the bucket and grows for retirement. This idea is known as “over-funding.” If a policy is over-funded, the impact is the funds in your bucket will grow faster in a tax-deferred vehicle. A properly designed policy takes advantage of the tax impact of the plan and the costs of insurance that comes out of your bucket will always be less than the taxes you would have paid. In fact, it is the IRS who has set the rules on how low you can make the Face Amount. They did this because they know how powerful the concept of using life insurance as a retirement vehicle is and want to be sure it is not over used.
The other key element to plan design is the loan feature. Once our bucket has grown with all this tax-deferred money inside of it we need to have access to the funds in the he best and most efficient way. A life policy allows us to take loans from the policy and the IRS views loans from a life policy as a non-taxable event. This makes loans from a policy income tax-free and is a key reason that this concept is so attractive. Now when you hear the word “loan” most people think “there is interest and I have to pay it back.” Well in the life policy this is true but there is a difference. A properly designed plan includes a policy with what is known as a “zero-net cost” loan. What this means is that the insurance carrier charges you an interest on the loan, but at the same time they also credit you back the same amount of interest thus creating a “zero-net cost” for the loan. This may sound to good-to-be-true but there are many reasons why the carrier would want to do this. The most important is that the carrier knows once a client takes a loan on a policy they are going to keep the policy and this is a good thing for the carrier. So “zero-net cost” loans are pretty much a standard feature on most Equity Index UL policies.
As for the idea of paying the loan back. This is also true. The loan does have to be paid back, but the difference is it only has to be paid back either at death or at policy surrender. Since we know we are designing the policy for retirement income, we also know we will not surrender the policy once we start the loan process, so for a proper design the loan is paid back at death. This decreases the amount of income tax-free death benefit to the heirs but assures that all of the income received in retirement is tax-free.
In essence the idea of using life insurance to supplement retirement is a tax advantaged plan. For that reason it is important to design the plan and the policy to take the best advantage of what the IRS allows us to do. In all of our proposals that we do, we design our plans so that the least amount of insurance cost is coming out of the bucket and the most cash can be accumulated and accessed for retirement on a tax-favored basis. I would be happy to meet with, talk to or conference call with any of the people who have told you that this is not a good idea. Often times I find that once this idea is properly explained, the power of using a tax advantaged program becomes clear.
Jeffrey Berson; President