One of the complaints in the financial services field is that Insurance companies are only out for a profit and their products are inferior to other avenues for investments. In many instances this may be true. However, with regards to the division of Life Insurance my experience has been pleasantly productive with many opportunities. Let me validate this point by a further discussion of what I call the new concept in funding your Buy Sell Business Succession Plan, Indexed Universal Life.
First let me give a brief background. In past years many businesses were in fact looking to have a permanent, cash value accumulation Life Insurance plan. However, years ago there was only Whole Life. This for a while satisfied business owners’ needs. Yet the interest rate was low and there was limited flexibility. In fact the only flexibility was to change the dividend from being reinvested to using the dividends to reduce the premiums. This was not satisfactory to many. As a result, Universal Life in the 1970’s was born.
Universal Life adds flexibility not found in the traditional Whole Life policies. Specifically, the insured could control the premium by either increasing or reducing the premium amount. Furthermore, the insured/business owner could also change the Death Benefit of such plans. This was a god-send to many business owners as it freed up some capital to devote to other opportunities yet still provided the much needed death benefit to provide cash for a buy-out in the event of death. As years went by, the interest rate started to fall and it lost some, not all, of its’ appeal. The Life Insurance companies responded with what is now called Indexed Universal Life.
With Index Universal Life, the excess interest credited to your cash value is taken from any gains in the equity markets. For our purposes we will refer to this as the S & P 500. Thus, if there were any gains in the S & P 500 over the policy year, then at least some and sometimes all of its gain was credited to your cash value account. If there were any loses in the S & P 500, your cash value would remain the same and your cash value would not be reduced.
Our next discussion will describe this process in greater detail. For now keep in mind this important concept. IF I showed you a way whereby your cash value would be tied to returns in the stock market, where you could change your premiums and you would not lose any money in a down stock market, would you be interested? In short, that is what Indexed Universal Life is. One last factor before I close this session. I spoke about reducing or changing the premium. How about this concept? Pay the regular annual premium and then when the policy accumulates substantial cash value, stop paying further premiums and use the policy in the form of a paid-up policy.