When planning for retirement and weighing the options of an FIA or an Equity Indexed Life Insurance policy, the EILI policy will often provide higher annual returns. This means that it will generate more money in retirement. Not only will the client benefit from increased income amounts, but the life insurance policy will also have a death benefit that is not found with an FIA. Life insurance policies that are MEC are a great way for any client to begin building wealth for retirement.
Equity Indexed Life Insurance policy that is MEC
Based on the example client in the first section of the article, we now ask what the best option is for the client when he reaches the age of 66. We will first make the assumption that he will take 20 years to equally spend down assets equally. We will go on to assume that the FIA being offered will return 5.5% each year and the life insurance policy will have a return of 7.5%. You may already be asking why there is such a difference between the two returns. An FIA will usually have an upper limit on the amount that it can earn each year and that amount is between 7 and 9 percent of the stock index. The life insurance policy will also have an upper limite, but the amount is 12 to 16 percent, which is determined by the policy that is being used. The higher limits will indicate that the life insurance policy will also produce higher returns.
Fixed Indexed Annuity Returns vs. Equity Indexed Life Insurance Returns
When the client reaches the age of 66, how much money will he have the opportunity to remove from an FIA? Between the ages of 66 and 85, the amount would be $13,190. With the life insurance policy, that amount is increased to $17,110 each year for the same age bracket. This equals a return that is 23% better than the return from the FIA. In regards to how the income is treated in terms of taxes, the taxes will be the exact same for the two unless the client chooses to annuitize the annuity.
Variable Loan with Equity Indexed Life Insurance
Let’s look at the same situation if the numbers are changed a bit. The $17,110 was based on an interest rate of 7.5% of the amount of the funds that were borrowed from the policy between 66 and 85. The life insurance policy will have a variable loan option and this will produce a positive spread between the lending and crediting rates on loans from the policy. To learn more about how variable loans work, please visit: cash value life insurance
What would happen if the interest rate changed to 6.5% and the variable loan option was used? This would then mean that the client would have the ability to remove $19,091 each year, which is now 30% better than using an FIA. If there was a 2% positive spread, the number would jump to $21,202 each year, equaling a 38% increase over an FIA.
Equity Indexed Life Insurance (EILI) is a higher risk and have more expenses
Unfortunately, things are never this simple. Even though the life insurance policy, which is a MEC, will return more money than the FIA, there is a higher risk to using the policy instead of the annuity. Life insurance policies will always have more expenses and these costs are typically offset by offering higher caps and returns annually. However, this only rings true if the policy performs well in the long run. Otherwise, the annuity will take top billing.
To explain this even more, let’s take a look at an example. We will say the life insurance returns just 6.5% and a 5.5% loan rate is being used. The client would then be able to take $15,428 from the policy. However, if the lending and crediting rate were both 6.5%, the amount would decrease to $13,792 annually.
MEC Life Insurance Policy Advantages
There are various benefits to using a MEC life insurance policy instead of funding an FIA. These advantages include:
- Upon death, the death benefit of the insurance policy will not be taxed when it is passed to beneficiaries. Keep in mind it will still be subject to estate taxes unless an irrevocable trust is the owner of the policy. In the case of the example client, if he died at the age of 85, there would be a death benefit of $50,000 payable to heirs. This would not be the case if the client funded a FIA instead of the insurance policy.
- With the life insurance policy, the death benefit will exceed the value of the annuity. When the policy was purchased at 55, the death benefit was $270,000, which is already $170,000 more than what would be passed to heirs from an annuity.