ELITE ADVISOR BEST PRACTICES

Weathering Market Changes

Life insurance and annuity products can help clients reach their financial goals regardless of changes in the market.

By Steve Zeiger

Key Takeaways:

  • Most of your clients have experienced significant volatility in their investment portfolios and are likely looking for ways to secure their retirement planning.
  • Incorporating financial products with features such as tax-deferred growth or guaranteed minimum crediting rates may help mitigate the risk of other assets losing value during market downturns.
  • If you want to ensure that your clients reach their planning goals, you need to consider employing life insurance and annuity products to diversify and stabilize their portfolios.
The many hidden benefits of life insurance and annuity products.

If your clients are like most people, in recent years they have experienced significant volatility in their investment portfolios. Depending on their savings and retirement goals, weathering the ups and downs of the market may have caused serious stress and concern. Even the most diversified portfolios and well-executed investment strategies are not immune to major market changes. These changes can seriously jeopardize your clients’ ability to reach their retirement goals. However, it is our job to help our clients reach their financial goals regardless of changes in the market—and if we’re really good at what we do, perhaps even in spite of those fluctuations.

Fortunately, there are several financial tools available to help make this possible.

Life insurance policies are primarily viewed as financial tools utilized at death. They pay a stated amount to beneficiaries upon the insured’s death, and the proceeds may be used for anything from income replacement to alleviating estate tax burdens. However, did you know that some life insurance policies also offer benefits during life?

Most life insurance policies share some unique features. (This article is limiting the discussion to certain permanent policies.) Properly structured, these policies are protected from creditors, whereas your clients’ other assets may not be. They are supported by the full faith and credit of the insurance company, whereas your clients’ other assets may be tied to far more risky investments. They are also tax-favored financial vehicles where internal cash value can grow tax-deferred over a long-term period. This cash value can be borrowed from the policy income tax-free or can be withdrawn from the policy income tax-free up to cost basis.

Variable Universal Life

Variable universal life policies may be an attractive strategy for clients who are interested in long-term, tax-deferred cash value accumulation to supplement their retirement needs. These policies allow the owner to invest in either the insurance company’s fixed account or to move investments into separate accounts outside the insurance company and entirely control their own investments. These separate subaccounts allow policy owners to invest in a wide variety of accounts that are much like mutual funds. The selection usually includes between 50 and 80 different funds that offer the appeal of many investment styles. This type of policy is best-suited for clients who understand the potential risk and volatility associated with investing in variable universal life and how movements in the market and their fund choices will affect the performance of the policy. In this structure, market changes may be a significant factor in the long-term performance of the policy, but it offers the advantage of tax-deferred, market-correlated investment gains. The opportunity for potential growth is significant if the underlying investments perform well.

Equity Indexed Universal Life

If you have clients looking for control of their underlying investments with less risk than that of a variable universal life policy, consider indexed universal life policies.

Indexed universal life policies provide flexibility for your clients’ ever-changing circumstances and the potential for cash value accumulation on a tax-deferred basis. The cash accumulation is based on the performance of a stock index, such as the S&P 500, or multiple indices. The policy owner has the ability to control investments by allocating cash value amounts to either a fixed account or an equity index account. However, while they are tied to market returns, these policies offer a crediting "floor" that can protect your clients from negative returns. Additionally, the policy owner has the ability to customize the death benefit, length of coverage and premium obligation so that the policy is best-structured to meet their potential retirement needs.

Traditional Universal Life

For a more conservative approach, traditional universal life insurance policies can offer the potential for tax-deferred growth without the same correlation to market fluctuations. This type of policy typically has a guaranteed minimum crediting rate of between 2 and 3 percent, but they currently credit higher interest rates as determined by the insurance carrier. As crediting rates are fairly low right now, approximately 150 to 250 bps higher than the guaranteed minimum crediting rates, there is less risk of buying a policy that will eventually be credited with a far lower rate than designed. If interest rates rise, the policy’s crediting rates will reflect that and increase the internal cash values at a rate faster than originally designed. Policies may also be structured to increase funding through larger-than-required premiums to grow cash value at a faster rate, within IRS limitations.

Annuities

Annuities are another financial tool offered by insurance companies; they are specifically designed to protect not only against market fluctuations but also against longevity risks. Like life insurance, annuities are available as either fixed, guaranteed products or as variable products in which the owner can control the underlying investments. Annuities also offer an array of additional features and options to serve various investor needs and provide tax-deferred growth as a retirement vehicle.

For conservative investors, an immediate or deferred fixed annuity can provide the owner with a stable, fixed income stream for life—and it cannot be outlived! No matter what the market does, the fixed payment from the annuity will remain the same. For more aggressive investors, variable annuities offer the opportunity for tax-deferred growth at higher interest rates, but they are tied to market fluctuations. However, there are some variable annuities that offer additional riders to help mitigate the risk of severe market volatility. These include guaranteed minimum interest rates as well as guaranteed minimum benefits. So even if the underlying account value of the variable annuity decreases, the owner’s retirement plans will not be thrown off course.

Meeting retirement goals means continuing to grow and protect investments. Negative market changes can quickly depreciate the value of investments; it can take years to regain current positions and even longer to see increases in value. Diversifying portfolios by including products that grow tax deferred, have guaranteed minimum interest rates or provide built-in income protection is one way that you may be able to help provide your clients with the retirement savings they require.


About the Author

Steve Zeiger of NFP National Madison provides advanced life insurance design and analysis services to clients and advisors. He is an expert in trust-owned life insurance and is a highly sought-after lecturer to attorneys, CPAs, family offices, asset managers and trust officers. For more information, contact him at (212) 878-1683 or at szeiger@nationalmadison.com. Securities offered through NFP Securities, Inc. Member FINRA/SIPC. National Madison Group, Inc., and NFP Securities, Inc., are affiliated and are subsidiaries of National Financial Partners Corp. (NFP)