NEW YORK (MainStreet) — Mike De Gruchy is an hourly contractor at his job in Manhattan in the music publishing industry, so benefits like life insurance are not offered to him. “If I ever change jobs to a full-time position, it would be something I would at least look into to find out more general information,” the 30-year-old told MainStreet.
It’s a good thing, though, that De Gruchy’s mother purchased a life insurance policy for him when he was a child.
“I can take over now as an adult,” said De Gruchy. “Because of that, I’ve thankfully had decades of investments that will benefit me later on in my life.”
Of course, not everyone realizes the benefits life insurance can have in planning for the future. Less than half of middle market consumers ages 25 to 64 have individual life insurance coverage, and 44% of those without life coverage say they need it, according to a 2014 LIMRA study.
Beyond a Death Benefit
Most consumers would be prudent to get life insurance once they have a family, and life insurance certainly can help protect a particular family's financial future in the event of a bread-winner's death.
“The great thing about having life insurance as part of an overall financial plan is that if the owner dies prematurely, the death benefit can be used to help maintain the family’s lifestyle in a time of financial and personal turmoil,” said Jeff Janes, chief marketing officer with AMZ Financial Insurance Services in Des Moines.
But the benefits of life insurance go further; they can be helpful in building retirement income. Indexed life insurance policies became popular with mainstream workers five years or so ago, because they provide a guaranteed rate of return with some potential upside. The cash value of the policy is allocated within an index, such as the S&P 500 or Nasdaq 100.
“Indexed life insurance policies are considered conservative compared to a universal variable life policy,” said Mark Tan, a financial advisor with Thrivent Financial in Chicago. “There’s no loss of principal capital, which is a huge advantage. There’s also a minimum guaranteed rate of return.”
That guaranteed rate of return can be as little as 0.5% or as much as 1%, according to Tan.
Larger insurance companies such as Allianz and Principal offer indexed life insurance or comparable policies.
“When the policy is properly structured and funded, the owner will experience tax-deferred growth of their cash-values and tax-free distributions of income at any age,” Janes told MainStreet.
“If the client makes it to retirement, the money that they’ve accumulated in their policy can be taken out in a tax-advantaged way,” said Janes.
Enthusiasm With a Dose of Caution
Although indexed life insurance policies are an attractive option for many people, regulators are reportedly investigating exaggerated claims made by product illustrations when an insurance agent shows the possible financial outcomes of a specific indexed life insurance product.
“Many insurance companies were using different historical formulas to show projected results and the National Association of Insurance Commissioners wanted to put some formal rules in place,” said Janes.
If new rules from the National Association of Insurance Commissioners (NAIC) are adopted, consumers can expect more clarity when insurance agents cite future credit ratings.
—Written for MainStreet by Juliette Fairley