The better annuity alternative?
There were $138 billion of indexed annuities in-force at the end of 2008. That number is certain to be higher today when you read this because of new premium, credited interest gains, and zero risk of market losses to principal. There is $138 billion-plus worth of credibility behind the indexed annuity value proposition. The indexed interest mechanism works, and carrier fixed annuity principal guarantees have withstood great challenges. Looking forward, can indexed insurance products be even more successful? The answer to that question is absolutely yes.
The success of indexed annuities, which is measured by their interest earnings, will have an ultimate consequence - income taxes. What if there was an indexed insurance product that came without income taxes? Would such a product help some of your clients better position some of their financial assets? Consider that LIMRA has estimated that 70 percent of annuity assets are ultimately paid to beneficiaries. That's a lot of income taxes payable in the future. What are the chances that the beneficiary's income tax bracket is higher than the annuity owner's bracket? What are the chances that income tax rates in the future will be higher than today? What if we could do something about this side effect of successfully owning indexed annuities?
There were $1.7 trillion of total deferred annuity assets in-force, so quite possibly $1 trillion will pass to beneficiaries. How much of that will be subject to income taxes? We do not know the answer to that question, but we do know that we can definitely help our clients leave more money to their beneficiaries.
Single-premium indexed life insurance (SPXL) matches the indexed annuity product in many important ways. Single-premium indexed life accumulates indexed interest, guarantees a benefit at death, permits contract value access by 10 percent withdrawal, has a low-interest loan option, an income settlement option, and can be obtained without the steps normally required for life insurance. The difference with SPXL is that when the full contract value is paid upon death, there are no income taxes due -- none, zilch, nada.
Let's address the typical objection first -- qualifying for life insurance. Single-premium indexed life is built for convenient application and easier qualification. It can be obtained by answering two pass-fail questions and a 15-minute phone qualification interview.
One carrier tells me that more than 80 percent of their SPXL applications are successful. There is no exam, no bodily fluids testing, and no weeks of waiting for medical records. The process usually takes just a few days. If additional information is needed, the agent approves any such request. In other words, the agent controls the qualification process. If more information is needed to obtain an SPXL contract, the agent determines if the carrier goes forward. If the agent wants a quick answer -- yes or no -- that is what you get.
Many clients own multiple annuities, CDs, and other fixed income assets. They often earmark some of their assets to pass to their beneficiaries. Some of those earmarked assets can be more effectively delivered with an SPXL contract. Funds paid into an SPXL contract are guaranteed by the insurance carrier in the same way as the indexed annuity. SPXL benefits at death are 25 percent, 50 percent, and even 100 percent more than the premium paid, depending on age, gender and tobacco use. This amount is much higher than any annuity premium bonus.
Let's consider the other SPXL product features compared to an indexed annuity. SPXL funds can be accessed in all the same ways as the indexed annuity, except there is no guaranteed lifetime withdrawal benefit. Indexed interest factors for the SPXL are considerably higher than the indexed annuity in order to offset the SPXL benefit and contract charges. Both indexed products have charges for early surrender, though the SPXL charges are usually much lower. One last item is commissions - the SPXL commission rates are much more than the average indexed annuity commission.
From LIMRA again, most single-premium life insurance contracts are believed to be sold today in the bank distribution. Any guesses what the source of funds might be? Just like annuities, bank CD owners earmark funds for their beneficiaries. Single-premium life contracts defer income taxes on contract value growth and pass the full benefit at death tax-free. Why leave this client planning opportunity to the sales people in the bank? They sell annuities to your clients and prospects now, and you can sell a better single premium life contract to clients and prospects, yours and theirs. You know how indexed interest works, and you know that indexed interest works better. That means your SPXL contract is better than other single premium life products, and that means even more money for the beneficiaries of your clients.
*For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.