Index Life Insurance

Have you explored Index Life Insurance? A safe and secure retirement income has become more complex. Interest rates are on the floor. Fixed income yields have collapsed. The struggle for income has never been harder. But high net worth advisers are turning to a solution that’s been around since the 1980s.

It’s called indexed universal life insurance. In this short piece for private clients of GSB Capital, we’ll focus on how it’s being used to fund retirement, as well as leaving a lump sum for your family or other beneficiaries of your wealth.

What is Index Universal Life Insurance?

Indexed universal life insurance (IUL) is a whole life insurance policy that pays a lump sum on your death. The policy premium is invested in a cash account that offers investors returns linked to stock market returns.

On the surface, index universal life insurance, or jumbo insurance, as it’s sometimes called, may not seem like an income producing solution. After all, it’s whole of life insurance.

But that’s where an IUL policy’s cash value comes into play. The policy value can be tapped for withdrawals, which can provide you with an ‘income’. The withdrawals come from the policy’s growing cash value. It means you can enjoy the policy’s benefit in your lifetime. And you’ll still leave a legacy for the next generation.

How does Index Universal Life Insurance work?

Index universal life insurance returns are linked to major stock market indices. The S&P 500, Hang Seng and Eurostoxx are popular choices for investors. Index returns are also simple for investors to understand.

Capped returns

Different insurance companies will offer you different levels of index returns. These returns are typically capped at 8% to 10% per year.

If the S&P 500 rises 15%, your policy returns will be limited to the cap. In other words, you participate in your chosen equity market returns with a capped upside investment return.

Safety first

BUT, and it’s BIG but… your policy will never lose value from stock market losses. And that’s guaranteed. It’s worth repeating.

You are guaranteed to never lose money in your IUL policy when stock markets drop. That’s because the insurer gives you a zero floor on returns. To put it into context, if the market you are invested in falls 30%, your policy loses no value from this drop. And that comes with a rock solid guarantee for the rest of your life. (And there aren’t many of these in life.)

So you benefit from exposure to stock market growth, but never suffer a capital loss from equity market returns. And that brings us back to how you can use these types of policies for retirement.

Retirement income

If you are taking an income from your portfolio, guaranteed protection against no investment losses is paramount. Why? Because if the market falls and you are taking an income, that’s ‘double compounding’ your downside.

You have to sell investments that have already dropped in value. But with IUL, you are no longer a forced seller. You take the withdrawal you need and wait for your traditional investment portfolio to recover its value. Here are some other benefits to using life insurance alongside your existing portfolio:

  • – Reduces portfolio risk and increases your returns (we all want this).
  • – Lowers sequential investment return risk (that’s the problem of withdrawing money when the market falls. In extreme times, you could run out of money).
  • – No rebalancing (saves being out of the market).
  • – No buy/sell costs (saves money).
  • – Guaranteed liquidity (safe and re-assuring).
  • – No capital gains tax (in the policy).
  • – No need to hunt for yield (because there is none).

Too good to be true

It’s a concern we’ve heard more than once. There’s no magic solution for retirement planning. But we believe this is an excellent solution to add to your existing investment portfolio.

If you want to find out more, ask your GSB Capital adviser to get an illustration showing you a policy’s potential benefits. Work with your trusted adviser and experienced life insurance broker to personalise the policy set up to meet your own needs. Here are some questions to get you started:

  1. 1. How much life cover do I need?
  2. 2. Do I need to have increasing cover?
  3. 3. What’s my investment budget?
  4. 4. When do I plan to retire?
  5. 5. What income do I want?
  6. 6. Who will benefit from the policy after my lifetime?
  7. 7. What are my policy investment options?
  8. 8. Shall I dollar cost average into the policy?
  9. 9. How do I pay for my policy? Lump sum, multi-pay or premium finance.

Conclusion

To sum it all up. Adding an index universal life insurance policy to your existing portfolio increases investment returns and reduces risk. You can also use it to create income as part of your retirement plan. And you still get to leave a financial legacy for the next generation.

About Capital for Life

Capital for Life provides life insurance and premium financing services to wealth managers, private banks, trust companies and family offices. It provides solutions to (ultra) high net worth clients in 200 countries across 7 continents. Capital for Life is independently owned and has no conflicts of interest.

Carlton Crabbe is the Chief Executive Officer of Capital for Life. For the past 25 years, Carlton has advised (ultra) high net worth clients on complex issues, such as global tax, offshore structuring and international life insurance solutions. Private clients and institutional clients have included Google, Red Bull, Blackrock, L’Oreal, Premier League footballers, PGA Tour golfers, pop stars, diplomats, the British government and entrepreneurs.