The same concerns that weighed on the life insurance industry eight years ago once again weigh on it today. A new president, uncertainty about future taxes, increased scrutiny of estate planning methods and pressure on no-lapse guarantee reserves and pricing. The stress these factors put on the estate planning market is pushing more and more producers to focus on other opportunities, such as retirement or small business planning.
Eight years ago, as a relatively new product, indexed universal life (IUL) caught hold in the supplemental retirement income market and has rapidly grown into one of today’s most popular products. But its popularity in the small business market has not grown as quickly. That, however, is starting to change.
IUL products are general account products designed to provide protection against the impact of market downturns while offering upside potential based, in part, on the positive movement of a market index—limited by company set cap rates. If you think about a typical small- to medium-sized business, this product is an ideal fit for a number of reasons. Let’s look at a couple of the challenges facing small businesses today and how IUL can help address them.
First, these companies generally cannot handle volatility in their balance sheet as well as large, multi-million dollar organizations. As a result, many smaller companies have their cash invested in conservative, low interest investments, such as CDs or money market accounts, earning a nominal rate, which IUL’s design has the ability to exceed.
Second, these companies often have a need to maintain certain liquidity levels, either for bonding, credit collateral and/or emergency cash flow needs. These liquidity needs have prohibited them from using that cash to make purchases, even when needed. To help alleviate that issue, today’s IUL products have been outfitted with specialty riders that keep the cash surrender values at or near 100 percent when the policy is owned by a business. This allows a life insurance purchase to remain asset neutral on their balance sheet while maintaining necessary liquidity requirements.
Let’s look at an example. Company A wants to purchase key person insurance on a senior executive. Typically, this would be a term insurance sale. Assuming the company pays a $10,000 premium each year for 10 years, the premium amount will be a non-deductible business expense and the company balance sheet will decrease by the total amount of premium.
If, however, we assume the company pays a premium of $25,000 per year for 10 years to purchase an IUL product with an early cash value rider that guarantees at least 100 percent cash surrender value in year one, then the company still has a non-deductible business expense equal to the premium amount. However, they also have an offsetting asset equal to the cash surrender value—equating to a break even on their balance sheet.
As the policy cash value grows, assuming it exceeds the cumulative premiums paid, the company has a positive impact on their balance sheet. At the end of the 10 years, instead of a cumulative negative impact of $100,000, the company may have a positive impact of $100,000 or more, depending upon the performance of the product. While the premium cost is higher for the IUL product, at the end of the day the company may end up in a better position. It also gives them the flexibility to use the cash value if the need arises.
This same opportunity is also available for other life insurance uses, such as an ownership redemption buy/sell agreement, ESOP repurchase liability or a nonqualified deferred compensation plan to help recruit, reward or retain their key executives and management. By providing these opportunities, small companies now have the ability to meet multiple business needs while protecting their balance sheet and maintaining that critical liquidity position.
While IUL has not gained as much momentum in the small business market as in the retirement market, its popularity is growing. Producers who recognize this opportunity exists today will have an advantage over those producers who may be taking a wait and see approach.
Chuck Van Devander
is the senior vice president of COLI sales for Global Atlantic Financial Group. Global Atlantic, through its subsidiaries, offers a broad range of retirement, life and reinsurance products designed to help customers address financial challenges with confidence. Van Devander may be reached at Global Atlantic Financial Company, 215 10th Street, 11th Floor, Des Moines, IA 50309. Telephone: 515-393-3779. Email: firstname.lastname@example.org.