Asset class with upside potential, downside protection


September 13, 2021

5 minutes to read

Source / Disclosures

Disclosures: Mandell does not report any relevant financial disclosure.


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For many physician investors, the current bull run in the US stock market – the longest in its history – has raised long-term concerns about how the markets will move over the next decade or two.

At the same time, yields on bank accounts, CDs and treasury bills are near all-time lows and government policy appears to dictate that interest rates will remain low for the foreseeable future. In this environment, many physicians may be looking to use an asset class in their portfolio that offers some upside potential, with downside protection.

This short article covers one option that, if implemented correctly, can achieve this – an equity indexed universal life insurance policy.

Universal life insurance policy indexed to equities

An Equity Indexed Universal Life (EIUL) policy is a type of cash value life insurance policy because it has a cash value / investment portion as well as a death benefit. Cash value policies are also referred to as “permanent” policies because they have no term after which they will expire (i.e., term policies) and are intended to be maintained until the death of the policyholder. ‘assured.

David B. Mandell,

David B. Mandell

There are several types of cash value life insurance, including variable life insurance and whole life insurance, where cash values ​​increase based on various methods. With an EIUL policy, cash values ​​are used to implement a collar strategy.

In a tunnel strategy, the insurer writes call options and buys protective puts on the positions it holds. In turn, the performance of the policy is linked to an index, such as the S&P 500, a market-capitalization-weighted index of the top 500 listed US companies.

Thanks to the collars strategy, the insurer guarantees the policyholder a floor or a minimum return (ie 0%) which protects him from losses. With an EIUL, if the index to which the policy is linked decreases by 20%, the cash value will not decrease. The cash values ​​of EIUL policies also have an upward cap, or cap, (i.e. 10%), which means that if the index exceeds the cap, the policyholder will get a portion of the total increase (i.e. capped at 10%).

Due to their upside potential, combined with downside protection, EIUL products have been extremely popular since the Great Recession, with over $ 2 billion invested in new EIUL policies in 2018 alone.

Benefits of an EIUL policy

In addition to downside protection / upside potential, EIUL policies have the benefit of increasing cash value tax-free and, if managed properly, are accessible tax-free. Additionally, in many states, cash value is fully protected from prosecution by law.

Risks of an EIUL policy

Like any investment product, EIUL insurance involves various risks. One of these risks is that EIUL policies are not 100% liquid; in fact, policies typically have a surrender period of 8 to 12 years, during which, if the policy is completely surrendered, a surrender charge is measured against the surrender value. This charge can be avoided by removing some, but not all, of the cash value.

Another risk inherent in EIUL and other permanent life insurance policies is the possibility that the insured may not be able to meet the designed premium schedule. The size and costs of a policy are based on the premium schedule established when the policy was implemented (ie $ 10,000 in premiums each year for 10 years). A deviation from this premium schedule by the policyholder can have a significant negative impact on the performance of the policy.

Finally, since the cash values ​​of an EIUL policy are managed by the insurer, it is also important to recognize the insurer’s solvency risk. This is why it is crucial to use the highest rated companies with a track record of over 100 years.

Implement an EIUL policy

As described in our book Wealth planning for the modern physician, there are several critical success factors for the proper use of permanent life insurance policies, including EIUL. Here we will focus on three – investing over a long-term time horizon, using the appropriate policy design from the start and regularly reviewing the performance of the policy.

Long-term time horizon. If an EIUL policy is designed to accumulate large cash values ​​for the policyowner’s retirement, it is important that the purchaser has a relatively long time horizon (15 years or more). Of course, if the policy is designed for estate planning, this time horizon can be 30 years and more, depending on the age of the insured.

One of the reasons a long-term horizon is important is spending within the police. In most EIUL policies, the spending is “started”, which means that it is relatively high in the first few years and relatively low in the following years. While a doctor can view an EIUL policy as a long-term investment and keep the policy well beyond the surrender period, they have effectively amortized the initial costs over time and will not be penalized if they surrender the policy. in the future.

Beyond the upfront policy expenses, there is another important reason to keep policies in place for longer periods: taxes. This is especially true for physicians who use such policies for future retirement income, because the tax advantages offered by a policy (tax-free growth within the policy and tax-free access through withdrawals from the policy). base and policy loans) only increase in value as policy growth worsens. overtime. Like a Roth IRA, simple math dictates that the longer you can enjoy tax-free growth and access, the better.

Appropriate policy design from the start. Good design of any life insurance policy involves good communication between the purchaser of the policy and his insurance agent. Most importantly, the agent understands exactly why the customer is purchasing the policy. Are the proceeds of the death benefit used to protect the family or part of a retirement income strategy? Once the agent understands the objective of the policy, he can design it correctly from the start.

For example, when the goal is to accumulate cash value for retirement, the agent should design the policy to minimize death benefits for any premium level, within tax rules, because death benefits lower means lower insurance costs. Further, the policy can be planned, within the framework of the tax rules, to reduce death benefits over time and should be designed to do so from the start.

Regular revisions and maintenance. In this regard, permanent life insurance is like any other asset class one might invest in – regular reviews of asset performance are mandatory. Just as a physician reviews their investment performance with an investment advisor quarterly or annually, they should also review their EIUL policy with their insurance agent.

It is in these reviews that decisions are made on a myriad of policy options. Whether it’s changing the investments within the policy, paying more / less premiums or changing the premium frequency, adjusting the death benefit, adding or removing a beneficiary, or even to swap the policy for another type, regular reviews are where both the officer and the policy owner raise issues. light and make decisions accordingly. Permanent life insurance is not a “set it and forget it” asset – few valuable assets are.

Conclusion: work with a professional

An EIUL policy can be a valuable part of a doctor’s overall portfolio, especially for those looking for downside protection with upside potential. Since these products are complex and carry inherent risks, it is always recommended to work with a knowledgeable professional advisor to assess options.

Reference:

Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free of charge as a print or electronic download by texting HEALIO at 844-418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.

For more information:

David B. Mandell, JD, MBA, is a lawyer and founder of the wealth management company OJM Group. You should seek professional tax and legal advice before implementing any strategy discussed here. He can be reached at mandell@ojmgroup.com or 877-656-4362.


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