Indexed Universal Life Insurance
If you’re a high earner seeking options for a tax-free retirement, an Indexed Universal Life (IUL) policy can be an attractive choice. IULs can help you build wealth while leaving a death benefit for your loved ones. However, it’s important to know how IUL insurance works before buying a policy.
What Is IUL Insurance?
Indexed Universal Life is a permanent policy with a cash value component and a death benefit. As the policy owner, you can choose a percentage of the cash value to invest within certain “indexes” such as the S&P 500 or Nasdaq 100 to improve the chances of larger returns. Funds do not earn a fixed rate of interest but normally come with an interest rate guarantee.
Key Features of IUL
- No fixed interest rate
- Interest rate guarantee
- Access to cash value
- Adjustable premium payments (within limits)
- Adjustable death benefit
Pros of IUL
By adding IUL to your investment portfolio, you get the opportunity for stock market gains. The cash value has a minimum and maximum guaranteed interest rate, so you can be at ease knowing you’re never losing money.
You also get some flexibility when trying to meet your investment goals. You choose how much risk you’d like to take in the market and adjust death benefit amounts as needed. Riders are also available, making the policy customizable.
Like other types of life insurance, IUL can provide a tax-free death benefit for your heirs. They can use the money to cover funeral and burial costs, pay outstanding debts such as a mortgage or student loans, fund college tuition, or pay daily living expenses.
And, if you have enough money in your account, you may be able to use that to help pay your IUL premiums.
IUL has a zero-percent floor which guarantees you NO market losses in bad years.
Cons of IUL
IUL insurance can be more complicated than other types of life insurance. There are often caps on returns, and the policy comes with fees that are usually “front-loaded” for the first 5-7 years. For example, a person who establishes an IUL when the market is performing poorly could face high premium payments that don’t contribute anything to the cash value.
There are some fees and other costs, including premium expense charges, cost of insurance, policy fee, administrative expenses, etc. which can take from the rate of return offered by your IUL policy.
What the Pros and Cons Mean
There are considerations and responsibilities that you must take on when purchasing Indexed Universal Life. When you keep these things in mind and budget for potentially higher premiums, IUL insurance can provide a unique mix of policy features and benefits to help you financially protect your family.
What Else Should I Know?
You can structure indexed universal life insurance to include living benefits, allowing you to access the policy’s face amount to cover costs associated with critical, chronic, or terminal illness, and long-term care needs.
Who May Choose Indexed Universal Life Insurance?
If you want long-term life insurance and to build your cash account over time, then permanent life insurance might be a good option. IUL offers growth potential based on the market AND protection from loss if the market drops.
Do these features interest you? A licensed advisor at The Think Wealth Group can help you make an educated decision on whether an IUL policy fits into your financial plan.