The Case For Equity

Index Life Insurance

By Pat Kerfoot CLU ChFC CFP

Kerfoot Financial Services

Howard Hughes Plaza
10161 Park Run, Suite 150
Las Vegas, Nv. 89145
702-684-7598
www.KerfootFinancial.com
11/1/2016

Financial markets may have recovered since the market crash of 20082009 but many investors have not! The long slow recovery from 2008, continued
market volatility and the fundamental weakness of the economy have made
many investors wary and uneasy of the stock market. They were burned once
and they are afraid of being burned again.
People who lost 30% or 40% of their savings in the market crash are
hesitant to again risk their money in the market. As they look for an alternative,
safe investments with a reasonable rate of return, they are stymied. In todays
low interest rate environment those alternatives simply can not be found.
These investors are on the horns of a dilemma. They do not want to
expose their money to market risk. However, safe investments offer no real
return.
Equity Index insurance products, whether life insurance and annuity,
might be an answer. These are products that offer the potential to earn interest
in years of market growth and yet protect principal and earned interest from
market losses.

Equity Index Life Insurance

Let me be clear on one point. Above all, equity index life insurance is just
that life insurance. The primary benefit of any life insurance product is to
provide an income tax-free benefit to ones heirs in the event of death. Life
insurance offers the powerful ability to leverage dollars to care for those you
love when you will not be able to care for them yourself. This is the primary and

most powerful benefit of life insurance. However, life insurance has many
additional benefits that make it a powerful tool in a financial plan.
Equity Index Life Insurance is permanent insurance. It is designed to
provide life insurance protection throughout ones life. In addition to the life
insurance protection is has many powerful benefits one of the most powerful
is the ability to build cash value on a tax-deferred basis.

Cash Value Growth

Permanent life insurance whether whole life, universal life or equity index
life can build cash values. Typically cash values in whole life and universal life
policies are driven by the investment portfolio returns of the insurance
company. Equity Index Life offers a different approach than these traditional
insurance.
In an equity index policy annual interest is paid based on the performance
of selected market indices. The client and their advisor selects an index or
indices to track. At the end of the period (usually annually) interest is credited
to the policy based upon the performance of the index.
If the index performs positively then interest accrues to the cash value.
However, if the index performs negatively there is no effect on the cash values.
There are no losses due to market activity. Cash values can increase in positive
years. Cash values and earned interest are protected in down years.
This is one of the most remarkable features of equity index life. There are
no losses due to market activity! There are no negative years to be overcome.

Cash values compound in positive years and are no affected by negative market
performance.
It is important to note that the clients cash values are not actually
invested in the selected indices. Rather, the cash values are invested in the
general portfolio of the insurance company. Index performance is the
measurement used to credit interest to the policy.

Too Good To Be True?

In some ways it sounds too good to be true! How can the insurance
company credit positive returns in good years and not include the losses in
negative years? The insurance company utilizes Caps and Spreads to provide
good value and reasonable returns to policyholders while ate the same time
protecting its financial stability.
What is a Cap? It is a limit on the amount of interest that will be credited
in a given year. Suppose a life insurance policy has a cap of 12% on a given
index. This means that the company will credit interest of up to 12% in that
index. For example, if the index has a 6% return, the contract is credited at 6%.
If the index returns 12%, the contract is credited at 12%. However, if the index
performs at 18%, the contract is still credited 12%.
It might seem unfair that in a year of 18% performance the contract only
credits 12%. But lets remember, this is an insurance policy not a mutual fund or
stock account, the policy limits upside potential but it eliminates the downside.
The power of the equity index policy is that the policy will never credit a
negative interest.

Suppose that in the year after an 18% gain, the market recorded a 30%
loss. The contract would credit 0% return. The principal and interest credited
would be protected from market loss.
What is a Spread? A spread is almost the opposite of a cap. If a contract
had a 3% spread, the company credits interest once the spread is reached. For
example, if a contract had a 3% spread and the index performed at 12%, interest
of 9% would be credited (12% - 3% = 9%). However, if the index performed at
18%, interest of 15% would be credited (18%-3% = 15%). So there is a real
potential for growth in contracts with spreads.
However, if an index performed at or below 3%, there would be no
interest credited to the account. If the index performed negatively, there would
be no interest credited to the contract but the principal and earned interest
would be protected.
Contractually Guaranteed Interest
Some policies offer a contractually guaranteed interest rate. For example,
if a contract offers a guaranteed rate of 3% annually. This means that at stated
intervals (every 5 years) the company will recalculate contract values assuming
an annual return of 3%. If actual cash values are above the 3% annual rate the
values stay the same. However, if the contract values are below the 3%
contractual value, the contract is reset to the higher value.

Powerful Savings Tool!

No one should compare life insurance to a stock account, mutual fund
account or bond account. Securities function much differently that a life
insurance policy. Securities of the opportunity of greater return but also carry
greater risk of loss of principal. Equity Index Life Insurance offers protection of
principal and credited interest and a reasonable rate of return.
An equity index life insurance policy can be a powerful savings tool
because of the ability to protect principal, protect earned interest and obtain a
reasonable return. The ability to grow a cash account without losses due to
market activity is such an important feature of these products.

Liquidity
What if you need to access your cash values, are policies liquid? Yes, you
can access the cash values of your insurance policy. Most policies will provide
liquidity either in the form of policy loans or withdrawals. (Some withdrawals
may carry surrender fees.) Some policies allow for up to 50% to 90% of the cash
values to be withdrawn without penalty.
Life insurance cash values can be used for almost any purpose: college
funding, supplemental retirement income, to bank on yourself, as an
emergency savings plan and many other uses.
You should always speak to your financial advisor to understand how the
policy can best provide you with liquidity.

Tax Advantages
Life Insurance offers numerous tax advantages. The first and most
important is that the death benefit, with few exceptions, passes to ones heir(s)
income tax free. This is one of the most powerful features of life insurance, the
ability to leverage dollars to provide a tax-free benefit.
Life Insurance also allows the cash values to accumulate on a tax-deferred
basis. Unlike investment products or CDs that may generate capital gains or
interest income taxable in the year received, growth in cash value life insurance
is tax-deferred until actually withdrawn from the policy.
Some policies offer living benefits, discussed below.

Living Benefits
Some life insurance policies include provisions for Living Benefits. These
provisions allow the policy owner to access the life insurance face amount in the
event of certain emergencies.
Living Benefits can be available in the event of terminal illness or critical
illness to provide for medical care or other needs of the family. In the event of
Chronic Illness living benefits can be accessed to provide for long term care.
In many cases living benefits can be accessed on a tax-free basis.

Know Before You Buy

This article is meant to be an overview of Equity Index Universal Life Insurance.
It is not meant to be a complete treatment of the subject. Here are some other
steps should you take
1) Ask for the Company Ratings. Insurance companies are rated for their
financial strength. For cash value life insurance you should be dealing
with a company with an A or A+ rating.
2) Ask your advisor to explain the insurance charges to you. These are the
costs of the policy and will affect your returns.
3) Review the company illustration with your advisor. Have your
questions thoroughly answered.
4) Use a fiduciary. When you decide to buy life insurance, be sure to work
with a financial advisor who has a fiduciary responsibility to you.
Usually an insurance agent or a stockbroker is held to the suitability
standard. They are obligated to make sure the product is suitable at
the time of sale. A Registered Investment Advisor, CPA or a Certified
Financial Planner is held to a much higher standard called the
Fiduciary Standard. As a fiduciary they must put your interest above
their own, they are legally obligated to look out for your best interest.
Summary
I believe that Equity Index Universal Life Insurance is a great financial tool
for the long-term investor seeking a reasonable rate of return while protecting
the principal and interest. It is a tool that provides so many benefits:

1) Tax Free Life Insurance benefit for ones family or heir(s).

2) The ability to build a cash value account that protects your investment
but provides reasonable growth.
3) A cash value account that grows tax deferred.
4) Living Benefits in the event of terminal or critical illness to help with
the needs of ones family.
5) Living Benefits in the event of a Chronic Illness to meet one long term
care needs.
6) The ability to pass the death benefit to ones heir(s) without probate.

We used to say that you buy life insurance for those you leave behind.
Equity Index Life has changed the playing field. It provides incredible benefits:
tax deferred savings, potential for retirement income, assistance with long term
care and estate preservation, just to name a few. It is a wonderfully versatile
product that provides enormous benefits even while you are living.

About the Author

Pat Kerfoot CLU ChFC CFP

Pat Kerfoot has been helping retirees and pre-retirees plan their second life for over 14
years. Being a Registered Investment Advisor, Pat serves in a fiduciary role to all of his
clients. He specializes in retirement lifestyle planning with an emphasis on tax efficiency
and lifetime income. He educates his clients with a new way to think about money,
investing, and retirement planning. This gives them confidence that their money will last as
long as they do. Furthermore, hes also proficient in developing and implementing estate
planning strategies by working closely with a professional advisory network of
experienced CPAs and attorneys.
Pat came to the Financial Services field after a career in private education. He is a graduate
of Gonzaga University where he earned a Master's in Educational Administration and
Bachelor's with a concentration in History and Education. He holds professional
designations as a Chartered Life Underwriter, Chartered Financial Consultant and as a
Certified Financial Planning practitioner.
Pat has received numerous company and industry awards including membership in the
Million Dollar Roundtable. He is a member of the National Association of Insurance and
Financial Advisors and, as a financial educator, Pat is a member of the American Financial
Education Alliance.
In his classes and workshops Pat has taught thousands of people how to maximize their
Social Security income. Pat holds the National Social Security Advisor designation.
He lives in Las Vegas with his wife, Mary.

Investment advisory services offered through Kerfoot Wealth Management, LLC a Registered Investment Advisor in the state of Nevada.
Insurance products and services are offered through Kerfoot Financial Services. The aforementioned are affiliated companies.