Perhaps you have been introduced to Indexed Universal Life and liked the idea of acquiring a policy. However, you may need your hard-earned money for something else in the near future. A Surrender Value Enhancement Rider gives you immediate access to almost all of the premiums you have paid into the contract in the early years of the policy. It also limits risk should your policy get off to poor start.
Surrender Value Enhancement Rider (SVER)
Indexed Universal Life policies can be designed in many ways to best fit the needs of each client. For a client that is looking to minimize risk and maximize liquidity, the Surrender Value Enhancement Rider (SVER) can be a great feature to utilize. The SVER boosts early year surrender values, often to a value equaling 90-100% of premiums paid into the policy. This means that you can surrender your policy and not lose a significant portion of your already paid premiums. For example, if you paid $20,000 into your Indexed Universal Life policy the first year, with the SVER feature, you could surrender the policy and likely have the $18,000 - $20,000 back into your bank account. Whereas without the SVER feature, you may be looking at a significantly lower sum. With the SVER feature, you do not have to pay surrender charges, whereas without it, you will incur substantial surrender charges.
There's Always a Tradeoff
Limited risk in the early years will come at the expense of future supplemental retirement income, lower death benefit down the road, or a combination of both. These tradeoffs are not substantial, however, do make a difference so it is worth pointing out. If you are confident that you will need your Indexed Universal Life policy for at least 10 years or longer, and you won’t need to access its cash value until then, then the SVER may not be applicable to your case. This article will illustrate an example which will give you an idea of the tradeoffs that come with the SVER feature.
Example:
Sex: Male
Age: 45
Underwriting Class: Preferred Non-Tobacco
Death Benefit: $1,000,000
Max Funded 7-Pay
State: California
The First 10 Years
Below is a comparison of three different scenarios. The first scenario does not use the SVER feature. The second scenario includes the SVER feature and shows a non-guaranteed interest rate of 2.50%. We are including this scenario to show that if the policy were to perform poorly, the access to cash value is still great. The third scenario includes the SVER feature and shows a non-guaranteed assumed interest of 6.00%. For reference, the 15 year historical lookback on the index strategies that are illustrated are currently above 14%.
As you can see, the SVER feature greatly enhances the surrender value. Even with a poor performance during the first year as seen in scenario 2, the client still has access to over $73,000, or 96% of the premiums paid. Whereas in the policy without the SVER feature, the client only has access to roughly $46,000, or 61%, after surrender charges have been deducted. And that’s assuming a 6% return.
Effect on Supplemental Retirement Income and Death Benefit
Finally, let’s look at the difference the SVER feature has on Supplemental Retirement Income and the Death Benefit. Below is a comparison of the two different scenarios, both assuming a 6.00% interest rate.
The tradeoff in this example is that the SVER feature generates approximately $21,000 less in supplemental retirement income, which in the grand scheme of things, is a relatively small number. Similarly, the death benefit in year 20 is about $20,000 behind in the SVER feature scenario. But the surrender value is greatly enhanced in the early years should the client need or want access to the money. The cost of the SVER feature in this example results in approximately a 1% loss in retirement income and/or death benefit. However, the benefit in year 1 is over a 35% reduction in risk to principal.
Summary
The SVER feature makes a great case in Indexed Universal Life for clients who want to limit the risk of principal. The feature is relatively cheap and can make for a good addition for clients who would prefer extra protection.
Does the SVER feature on an Indexed product seem compelling to your needs?
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