There are several factors that are currently in place to create what I call “The Perfect Storm” for single premium life insurance. For financial professionals who currently sell annuities, this product line provides a smooth transition into the life insurance world. Thus, the purpose of the remainder of this paper.
At the time of this writing (August 2016), the average five-year CD is paying .80%. Even worse, the average one-year CD is paying .30%. This is only 30 basis points! Using the rule of 72, this would take a client 240 years to double their money and that is not including taxes! Even though I am being somewhat facetious with the “rule of 72” comment, when I share that statistic in client seminars the audience either laughs, sighs in shock, or both.
Furthermore, I also train agents and clients on the fact that risk is in the eye of the beholder. In other words, if $100,000 in a CD would guarantee you $300 (30 bps) a year in interest, is that money safe? Many people would say yes, but I would argue this not the case. With inflation averaging 3.9% over the last 60 years, one is guaranteeing themselves a loss in the purchasing power of their money to the tune of 3.6% (3.9% -.30%) per year. Alas, I would argue that CDs are some of the riskiest investments a person can make!
How much of this “lazy money” is sitting in banks earning very little? Total deposit balances at FDIC-insured institutions was $9.4 trillion in 2013, because of the “flight to safety” that has taken place since the financial crisis. This is a significant increase from the $6.7 trillion that sat in banks in 2007.1
When we look into the psyche of the person who has their money in these low paying instruments, they are not sitting in these savings accounts and CDs with the intent of getting large amounts of interest. Yes, they are attracted to CDs because they pay more interest than passbook savings, but most important to the investor is the money has more liquidity than say an annuity.
What if there was an alternative that did all of this, and then some? What if there was a product where your clients could receive interest on a tax-deferred basis that could possibly be superior to what they are getting with their “lazy money”? While at the same time, if interest rates on those CDs or money market accounts were to skyrocket, the client has the ability to cash out whatever he/she put into the policy via a “return of premium provision”? It is available and it is called single premium life.
Learn more about this topic in the full white paper by Charlie Gipple. It provides case examples, addresses costs and how you can find success in explaining these products to clients. Request the complimentary white paper HERE.
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Partners Advantage Brokerage Team at 888-251-5525, Ext. 700.
1 BAI, Perfect Storm for Rising Deposits, Dan Geller, Sept. 4, 2013
For financial professional use only. Not for use with consumers.
This material is intended for educational purposes only and is not intended to serve as the basis for any investment or purchasing decision. Insurance and annuity products: Are not deposits. Are not guaranteed by a bank or its affiliates. May decrease in value. Are not insured by the FDIC or any other federal government agency. This information is written in connection with the promotion or marketing of the matters addressed in this material. The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, your clients should consult their own tax or legal counsel for advice. Pursuant to IRS Circular 230, Partners Advantage Insurance Services and their representatives do not give tax or legal advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Encourage your clients to consult their tax advisor or attorney. The information contained in this article is not intended to serve as tax or legal advice and is not intended to provide financial or legal advice and does not address individual circumstances. Encourage your clients to consult their tax advisor or attorney. The information contained in this article is not intended to serve as tax or legal advice and is not intended to provide financial or legal advice and does not address individual circumstances. Both loans and withdrawals from a permanent life insurance policy may be subject to penalties and fees and, along with any accrued loan interest, will reduce the policy’s account value and death benefit. Assuming a policy is not a modified endowment contract (MEC), withdrawals are taxed only to the extent that they exceed the policy owner’s cost basis in the policy and usually loans are free from current federal taxation. A policy loan could result in tax consequences if the policy lapses or is surrendered while a loan is outstanding. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10% additional tax prior to age 59½, with certain exceptions. These characters are fictional and are not actual customers. Your own decisions should be made in light of your own financial situations. This hypothetical examples used are for illustrative purposes only, is no guarantee of return or future performance, and does not depict the actual performance of a specific product or its investment options. In order to provide a recommendation to a client about the liquidation of a securities product, including those within an IRA, 401(k) or other retirement plan, to purchase a fixed or variable annuity or for other similar purposes, you must hold the proper securities registration and be currently affiliated with a broker/dealer or registered investment adviser. If you are unsure whether or not the information you are providing to a client represents general guidance or a specific to liquidate a security, please contact the individual state securities department in the states in which you conduct business. Indexed Universal Life is not a stock market investment and does not directly participate in any stock or equity investments. Market Indices do not include dividends paid on the underlying stocks, and therefore do not reflect the total return of the underlying stocks; a market-indexed insurance product is not comparable to a direct investment in the equity markets. Clients who purchase IUL are not directly investing in a stock market index.