Sales Tip #13: Flexible Funding Options for an IUL Retirement Supplement Case

  • Originally published December 23, 2011 , last updated January 12, 2016
Sales Tip #13: Flexible Funding Options for an IUL Retirement Supplement Case

Retirement supplement is a strong concept in today's life insurance market. But many agents have a tendency to fall into a routine when working this concept, utilizing one or two common funding scenarios as a default.

We encountered a case last week that appeared, at face value, to be a typical retirement supplement case. We could have easily fallen into a standard operating procedure, but in working with the agent we discovered some additional needs for this client and we were able to put a sale together that was a better fit than the typical fallback solution.

Two Common Retirement Supplement Scenarios

When trying to maximize future income potential from a life policy, a common tendency is to take a specified funding amount and solve for minimum death benefit. Or to take a specified face amount and maximum fund it. Both scenarios do the same thing, just from opposite starting points.

But what happens when the specified funding doesn't provide a large enough death benefit? Or when the specified death benefit has too large a premium to max fund it? Does your client have to "max fund" the policy? Of course not; there are many funding scenarios that may allow for strong accumulation.

Another thing to consider is that the first two solutions leave no room for adding more funds later on in life. Both the above scenarios are already using the max funding for a given face amount—meaning more money cannot be contributed.

This is where you need to take a step back and ask your client what they need for a death benefit. Why not get your client the death benefit they need, provide them with a strong funding option, and provide them the cushion to add more money later in life. As they get older they may have more disposable income to contribute to this policy or they may expect some type of lump sum infusion. Where would that money go?

Case Study

Last week we were working with an agent who had a 49-year-old male client who owned a successful restaurant. With his income replacement and other obligations, he needed at least $1 million in coverage.

We decided to run the Builder IUL using the Guideline Premium Test with an Increasing death benefit (death benefit). This DB option would provide him the growing death benefit he wanted and also provide a larger guideline maximum funding level.

He couldn't fund it all the way up to the Guideline maximum amount of $59k per year, but still wanted to give the policy some cash to work with so he agreed to $25k per year (still well above target). Of course, no one knows what will happen in the span of 15 years, but his intention was to sell his restaurant and retire at age 65.

See Builder IUL Illustration for this Case

Why Not Max Fund?

The guideline level premium limit is a cumulative number that will continue to "roll up." The difference between the allowable guideline level premium and the lower amount you actually pay will be added to the guideline premium limit next year, and so on.

By running an "Increasing DB," we allow the large difference between his annual paid premiums and guideline to "roll up" over the years, giving us a big cushion for a dump-in at age 65 when he plans to sell his business. Also, since the initial premium was well below the 7-pay premium of $55k, the policy is a non-Modified Endowment Contract, so the policy maintains its favorable tax treatment.

While still funding this policy with strong premiums, we've left ourselves room for a lump sum later on—when the client plans to sell his restaurant. We've got outstanding projected surrender value. We're generating a strong projected income stream that surpassed cost basis in just over 16 years. And it's projecting to run through age 100.

Who Will This Work With?

This strategy isn't just for small business owners. It works for a variety of scenarios: those who may know that they have a future inheritance coming; also those who may not be able to afford large premiums now, but want the extra room in the future - a young doctor perhaps. The Builder IUL is a very flexible product that will allow you solutions for a variety of different scenarios.

So, the next time you're working on a retirement supplement scenario please consider leaving a funding cushion for your client. Remember, the most important consideration is that of the client's needs.