IUL

Retirement and the Role of Indexed Universal Life
by Bruce Wing

It goes without saying that people don’t always act in their best interest, especially when it comes to their finances. With longer life spans, a growing number of Baby Boomers will be unable to fund an extended retirement or their quality of life will be reduced. A client’s financial situation can be improved with an understanding of the issues that prevent proper accumulation for retirement and the particulars of employing an indexed universal life insurance policy.
There are 78 million Baby Boomers, many of whom are beginning to enter retirement. Last October, Kathleen Casey-Kirschling, a retired schoolteacher, was the first Baby Boomer to apply for Social Security. Between now and 2030, the number of Americans 55 and older will nearly double from 60 million to 107 million. Many will face some of the following problems:

1. Tax and accounting rules have changed and traditional pension plans became too expensive for most companies. Additionally, some large companies have gone bankrupt and terminated their pension plans. Further exacerbating matters is the fact that the Pension Benefit Guarantee Corp. (PBGC) isn’t on solid financial footing. PBGC guarantees the annual retirement incomes of about 44 million people up to $50,000 each. At the end of 2007, the PBGC was $13.1 billion in the red. People who bet their retirement security on the health of traditional pension plans may be vulnerable to an unpleasant surprise.
2. The financial viability of Social Security is in question. In 1950, one person received income from Social Security for every 16 workers. Today, the ratio is one to three, and in a few years, it will be almost one to two. In 2017, Social Security is expected to run a deficit for the first time in its history. Workers already pay 12.4% of their wages in taxes for Social Security. Payroll taxes would have to increase 50% to make the program whole at the current benefit levels. The Social Security system may require structural changes that could reduce the income that Baby Boomers expect.
3. Saving for retirement is an ongoing challenge. In 2004, Americans paid almost $3 trillion in taxes at the Federal, state, and local level -- an average of $26,738 per household. At the Federal level, we have a progressive income tax system. Households with adjusted gross incomes of $65,001 or more pay 85% of the taxes. Middle class retirees can expect to continue to shoulder a significant tax burden, which detracts from dollars that would be used to purchase household expenditures.
4. Disappearing pension plans, the future viability of Social Security, and the impact of taxes may be exacerbated by another of life’s certainties: human behavior. The core of financial mechanics is the Efficient Market Hypothesis and the Capital Asset Pricing Model. Both assume that human behavior is rational. Perhaps, but that doesn’t explain why many of us will buy tuna in bulk when it’s 75% off, but will only buy a stock when its value has increased 50% over the previous year. Author Robert Heinlein may be correct in saying that, “Man is a rationalizing animal, not a rational one.”
People rationalize the need to spend on vacations, big screen TVs, and expensive cars even when their personal retirement savings are low [outside of their 401(k)s]. Many people understand that they need to save more to ensure a comfortable retirement, but they invest in short-term depreciating assets rather than long-term securities with a potential to appreciate. Their nest eggs fall short, not because of investment performance, but because of human behavior. Conversely, assets in three core areas are generally successful -- homes, 401(k) plans, and life insurance policies because people invest in them consistently, month after month, year after year.

A Solution

How can advisors help clients combat the lesser angels of their nature? One solution is an indexed universal life insurance product. It mitigates the risk of leaving a family and business financially vulnerable in the event of an early death and functions as an accumulation vehicle.
IUL products are attractive to many policyholders because they provide an opportunity for higher interest earnings due to changes in an underlying index. These products guarantee that annual returns will never be less than zero, which protects the downside and favors opportunities for growth. IUL policies are afforded excellent tax benefits from the federal government. Cash values grow tax deferred. Based on existing tax law, withdrawals to basis and loans from these policies are not taxable as income.
The old saying, “Success is simple and simple is hard,” is particularly true for many people who need to accumulate money for retirement. While real problems prevent most people from achieving financial success, a rudimentary understanding of human behavior and a bit of financial discipline can drive long-term retirement success.
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Bruce Wing is Vice President, Life Distribution for Old Mutual Financial Network (OMFN). Bruce is responsible for the strategic leadership of all sales and marketing activities related to the life products of OM Financial Life Insurance Company and OM Financial Life Insurance Company of New York. Prior to joining OMFN, Bruce was Vice President of business development for Transamerica Reinsurance, and held sales and leadership roles at Jackson National Life Distributors, Transamerica Capital, Inc. and Transamerica Insurance & Investment Group. Bruce holds several designations from the American College and is a graduate of Piedmont College. He also has been a member of NAVA, AALU, ACLI and is an active member of the SFSP. Bruce and his family reside in Atlanta Georgia