Indexed Universal Life Insurance (IUL)

Indexed universal life insurance can be an extremely appealing way to build wealth and leave behind a death benefit for your loved ones. However, it’s important to understand how this coverage works before purchasing a policy.

Indexed universal life insurance IUL policies put a portion of the policyholder’s premium payments toward annual renewable-term life insurance. The remainder is added to the policy’s cash value after deducting fees. On a monthly or annual basis, the cash value is credited with interest based on increases in an equity index.

These policies allow you to invest a portion of your premium payments into a tax-deferred account, where it accumulates with interest.

What Is Indexed Universal Life Insurance?

Indexed universal life insurance (IUL) is a type of permanent life insurance offering cash value growth while providing guarantees from certain risks. IUL products credit interest based partly on the positive movement of an external stock market index, subject to certain limitations. Over time, IUL products may have greater long-term cash accumulation than other permanent life insurance products. 

Along with offering upside potential, IUL protects against negative market returns. Unlike variable universal life insurance, IUL premiums are not directly invested in separate accounts that are subject to market risk. Instead, their interest crediting rate is determined by the upward movement of a stock market index subject to certain limitations such as cap rates, participation rates, and an interest rate floor.

This design, along with the built-in tax advantages associated with permanent life insurance, provides for potentially greater interest crediting over the life of the policy when compared to traditional universal life designs. 

Even if the index decreases, your credited interest rate is never less than 0%. Guaranteed. How interest is credited to your IUL policy gives you the potential for strong cash value accumulation. A key benefit to remember is that it offers protection from market risk. With IUL, you don’t participate directly in the stock market, and the credited interest rate is always at least zero percent, guaranteed.

Mind-blowing benefits of indexed universal life insurance (IUL)

• One of the main benefits of indexed universal life insurance is that it offers the potential for higher cash value growth than other types of life insurance policies. This is because you can participate in the stock market’s upside potential without worrying about the downside risk.

• There is no contribution limit with IULs, unlike traditional retirement avenues.

• Investing in IULs is tax-free, and distributions are tax-free as well. In other words, you don’t have to pay taxes on the money you eventually withdraw from the IUL’s cash value, and it’s like a Roth IRA.

• Regular retirement programs require you to wait until you reach the minimum age of 59.5 to start taking money out. It is optional to be a certain age to apply for an IUL.

• Your beneficiaries will receive a tax-free death benefit, which means they won’t be subject to income taxes or death taxes.

• The amount of money you can borrow from your IUL depends on your policy and available cash. You won’t have to worry about penalties, taxes, or a credit check if you use your IUL in this way. Furthermore, the money you withdraw does not have to be repaid.

• The amount of money available for heirs depends on how long their beneficiary term lasts, whether they have children and how much they have saved over time into the policy itself (for example, if your beneficiary term.

• Allows you to create an income stream that grows tax-deferred. With inflation, this can provide significant growth over time.

• It gives you peace of mind knowing that your family will have access to funds in case of an emergency or death before age 80 when you pass away.

• Offers protection from creditors if you pass away without making payments on your policy. This could save you from having your assets seized by creditors if you fail to meet financial obligations related to your IUL insurance. Allows you to pay premiums on a monthly basis, which allows you to spread out the cost of your policy over time.

Indexed universal life vs. whole life insurance

What Is Indexed Universal Life Insurance:

Indexed universal life (IUL) insurance is permanent, which means it lasts your entire life and builds cash value. An IUL policy allows cash value growth through an equity index account, unlike other universal policies that only grow cash value through non-equity earned rates.

The gains and losses on the cash value portion of index universal life insurance are based on an index like the S&P 500. Although the insurance firm invests in bonds and mortgages, its cash worth fluctuates along with the index.

What Is Whole Life Insurance: 

In addition to offering a permanent death benefit, whole life insurance is known as traditional life insurance. Whole life insurance includes both a death benefit and a savings component in which cash value can accumulate. A fixed rate of interest is accrued, and it is tax-deferred.

Permanent life insurance policies include whole life insurance policies, universal life indexed universal life, and variable universal life is others. Although whole life insurance is the original policy, it is not the same as permanent life insurance since it comes in many forms.

Life insurance with indexing has several drawbacks

• The are times when insurance companies set maximum participation rates as low as 25% , which is below 100% in some cases. During good years, equity index returns are often capped at certain amounts. Your account’s actual rate of return can be restricted by these restrictions. even if your underlying index performs well. In that case, you may be better off investing in the market directly or considering a variable universal life insurance policy instead.

• Returns on IUL policies are based on indexes, and premiums change over time. As a result, you must be prepared to ride out returns fluctuations and budget for potentially higher premiums. 

• All these fees and various costs can detract from the rate of return your policy offer. That’s why it’s important to research the best life insurance companies to understand what you are paying for in coverage and get in return.

Pictorial difference between Indexed universal life and whole life insurance

How does IUL insurance work

When you purchase an indexed universal life insurance policy, the insurance provider will work with you to choose the index used for your policy’s death benefit, cash value account, and other components. A portion of the premium paid on the account covers the insurance cost based on the insured’s life. After paying any fees, the remaining amount is added to the cash value.

Interest is credited to the total cash value based on improvements in an equity index (but it is not directly invested in the stock market). You can borrow money against the policy’s cash value if you have an indexed universal life insurance policy. But if you don’t repay your loans, they’re subtracted from the death benefit.

The policyholder can choose from a variety of indexes under some policies. IULs often give customers a choice of indices and a guaranteed minimum fixed interest rate. The percentage assigned to the fixed and indexed accounts is up to the policyholder. The value of the chosen index is noted at the start of the month and contrasted with the value after the month. The interest is added to the cash value if the index rises during the month. Either monthly or yearly credits for the index gains are made to the policy.

Is IUL a good investment?

If the stock market tanks and your cash value grows faster than the market, then an IUL will be a good investment. An IUL will likely disappoint you during a boom in the stock market.

Who should consider Universal Life Insurance?

The III suggests that permanent life insurance may be a good option if you want lifelong life insurance and want to build your cash account over the long term.

According to the NAIC, indexed universal life insurance offers growth potential and protection from market losses. If these features are appealing, consider indexed universal life insurance. Your insurance provider can help you decide whether indexed universal life insurance is right for you.

How much indexed universal life insurance do I need?

Indexed universal life insurance is a particularly flexible form of life insurance that enables you to invest in various assets, including stocks and bonds. However, because so many investment options are available with this type of policy, it can take time to determine how much indexed universal life insurance you need.

While there are no hard-and-fast rules when it comes to deciding how much indexed universal life insurance you should purchase, here are some guidelines that can help you determine the right amount:

Start by estimating your current net worth. This includes all assets, such as savings accounts or investments, as well as liabilities, like credit card balances and mortgages.

Determine your future financial needs by projecting medical expenses and other possible expenses such as children’s education costs or retirement savings plans. If any of these factors are uncertain, consider making an estimate based on what might happen if they were certain.

Remember to include inflation in your calculations; However, it is difficult to predict how much prices will rise over time; most experts agree that they will increase significantly throughout your lifetime due to economic growth and other factors outside your control.

Are IUL policies risky?

It depends on what you define as risk and how much you are willing to take. Whole life is for those looking for a plain vanilla policy with no risk or return on investment. Due to their higher risk, IUL policies have a higher payoff.

IUL is gaining popularity as a life insurance policy because of its flexibility, safety, and potential tax advantages. It can be a viable solution for those who want a long-term strategy to manage assets.

 DONNA MARIE REESE Independent Life Insurance Producer, believe in the strength and value of indexed universal life and own policies as proof. My client’s interests always come first and are the highest priority.

If you’d like a better quote or to explore indexed universal life insurance as a retirement planning option, please call or shoot us an email. We are here to speak with you and help you with your financial goals.