A 50% loss in the S&P 500 occurred from late 2007 to March 2009. Trillions of US$ were wiped out. It was the biggest loss since the Great Depression of 1929.
Astonishingly, some investors remained insulated from this financial carnage, safeguarding their wealth through the security of indexed universal life insurance (ILU). Policyholders were unaffected by the mass sell-off of global equity markets.
These investors had bought indexed universal life insurance. They didn't lose any money.
We have found that using indexed universal life insurance increases investment returns and reduces risk when included in a client retirement planning strategy.
Definition | Indexed universal life insurance (IUL) is a form of permanent life insurance. Life insurance premiums fund a cash account linked to stock market returns. The remaining premium goes toward life insurance.
Let's find out how this works.
1. Zero Floor
One of the most powerful features of Indexed Universal Life (IUL) is its 'zero floor' guarantee. This means your policy is guaranteed to never incur losses from stock market falls, even during significant market downturns.
This protection offers retirees peace of mind, allowing them to benefit from the growth potential of the stock market without risking their principal investment.
Think of it as a safety net: your money is secure even if the market takes a nosedive. And because the floor resets annually, you start each year with a fresh opportunity for growth, regardless of past market performance.
To illustrate, imagine the S&P 500 plummeting from 1,300 to 670 points in a year. With an IUL policy, your investment would be shielded from this loss. The following year, your growth potential would simply restart from the new level of 670.
This zero-floor guarantee makes IUL a particularly attractive option for those approaching, or in retirement, as it mitigates the risk of depleting your savings due to market volatility. Even during the worst financial crises, your IUL policy will remain secure.
"Stocks fall to lowest level since 1997 as Dow drops below 6,800," USA TODAY, March 2, 2009
"Fourth-worst drop ever for Dow," AZ Central, December 1, 2008
You can visualise the financial crash of 2009 and the effect on the S&P 500 index. (In case you were wondering - the S&P 500 moves closely in line with the Dow Jones)
Did you know?
- The biggest annual drop in the Dow Jones Industrial (DJI) Index was -52.67%.
- 4 is the most consecutive years of losses in the US stock market.
Scary times for many investors, but not those invested in an indexed universal life policy.
2. Lower Investment Risk
The zero floor in an indexed universal life insurance policy mitigates sequence of returns risk.
Most investors have never heard of this type of risk. But this is one of the biggest investments risks around for those approaching or in retirement.
Here's a definition of sequential return risk.
Definition “the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available” ~ Investopedia.com
Minimising this risk can be critical to your financial security in retirement.
It has taken you years to save for retirement. The last thing you want to do is return to work to repair the financial damage of a stock market crash.
After using IUL as part of retirement portfolios, we have found that it dramatically reduces the sequence return risk.
But it gets better.
Investors can turn to their IUL policy to start taking withdrawals as income.
Why?
Because your IUL hasn't suffered any stock market losses.
It means investors can wait for their investment portfolios to recover their losses. When the markets have rebounded, income can start to flow again.
Did you know?
Including life insurance in your portfolio can reduce risk and increase returns. A win-win strategy for investors and their financial advisers.
3. Guaranteed No Losses
Invest in an indexed universal life policy and you'll never lose money when stock markets drop.
That's worth repeating and in bold,
With indexed universal life insurance, you'll never lose money when the stock market falls.
And that's guaranteed, for the rest of your life.
Do you own any other investments that guarantee you'll never lose money for the rest of your life?
4. Guaranteed Returns
Even when stock markets fall, you can benefit from a guaranteed credit of 2% to 3% every year in your indexed universal life policy if you cash out and markets haven't done better.
5. Stock Market Growth Potential
Investors know that stock markets offer the best returns to long-term investors.
But those who have been through a market crash know how alarming it can be.
It could take several years for you to recover your losses before you make any gains. And if you are taking an income from your investment portfolio, the problem will only get worse.
The combined losses of a portfolio value drop and income withdrawals can be distressing. But investors can turn to their IUL policy to start taking withdrawals as income.
Why?
Because the IUL hasn't suffered any stock market losses.
Financial Planning Point | Invest in indexed universal life insurance policy (IUL) as part of your portfolio asset allocation. When markets drop, use the IUL to withdraw income. You should leave your existing portfolio invested and wait for its value to recover.
Annual Reset
The annual reset feature of IUL policies offers a fresh start each year. Even if markets decline, your policy's value won't drop below the guaranteed floor. When markets rebound, your growth potential resets, allowing you to capture the full upside, up to the annual cap. This unique 'reset' feature eliminates the stress of timing the market perfectly, giving you peace of mind and consistent growth opportunities over time.
Annual Cap
The most used benchmark indices for index universal life policies are the S&P 500, Hang Seng and Eurostoxx.
When the index you are tracking makes gains, you get all those gains up to an annual cap. Different life insurance companies have different growth cap rates. Caps between 8% and 10% are common in international universal life policies.
6. Cash on Demand
Cash is king. Investors hold cash for liquidity. The trouble with cash is you don't earn much interest if any. Returns are poor. Especially over a long retirement.
But what if you could stay invested in the stock market, but make a cash withdrawal any time you needed it? Indexed universal life insurance gives you this opportunity.
You can tap the cash value that has accumulated in your policy when you need it. Also, if you need to borrow cash to make purchases, you can also do so from your own policy.
7. Estate Planning Benefits
And finally.
When retirement ends, you can leave a tax-free cash lump sum to your beneficiaries. After all, this is a whole life insurance policy, not just a retirement solution.
The death benefit will repay the wealth you invested and the withdrawals you have made. Still leaving a large cash lump sum for the next generation.
Example
A 50-year-old non-smoking man invests $1.8m in an equity index life policy for $1.8m in premium.
He retires and starts taking 5% withdrawals from his policy. After 20 years, he's had all his money back ($1.8m). And he still has investment growth left in his policy, based on returns of the S&P 500.
And added to that, he could still leave his family with a tax-free payment of around $5m.
Do you know any other investment that offers this type of return?
Conclusion
Don't let market crashes shatter your retirement dreams. Indexed Universal Life insurance (IUL) offers a unique blend of protection, growth potential, and tax-advantaged benefits that can provide you with a strong financial future. With its ability to weather market downturns, provide steady income, and leave a lasting legacy, IUL is not just an insurance policy—it's a strategic tool for achieving a secure and fulfilling retirement.
Ready to discover how Indexed Universal Life insurance can transform your retirement plan? Take the first step towards financial peace of mind today. Capital for Life, as a leading life insurance broker specialising in IUL, partners with financial advisors, private bankers, and wealth managers to provide tailored solutions for retirement income planning.
Ready to consider IUL to help build a comfortable and secure retirement? Contact Capital for Life today for a personalised IULquote and discover the benefits of IUL for your retirement income needs.
Disclaimer
This article is written by Carlton Crabbe, Chief Executive Officer of Capital for Life, a specialist life insurance agency providing international life insurance solutions. The information provided in this article is for educational and informational purposes only and should not be construed as financial or investment advice. While the author possesses extensive expertise in international life insurance, readers are advised to consult with a qualified financial advisor before making investment decisions or purchasing insurance products.
