WHAT IS INDEXED UNIVERSAL LIFE?

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Is Indexed Universal Life Right for You?

Indexed universal life, or IUL, is a type of life insurance policy that provides both a death benefit and a cash value component. The funds that are within the policy’s cash value differ from those in a whole life insurance policy, or even from a regular universal life insurance policy, because the return with an IUL policy is tracked based on the performance of an underlying market index. One of the more popular index options is the S&P 500. (The policy holder may also be able to choose more than one index to track, depending on the insurance carrier and the policy).

When the underlying index performs well in a given year, then the cash value is credited with a positive return – usually up to a “cap” that is set by the insurance company. If, however, the underlying index performs poorly in a given year, the policy holder will not lose value in the account, but will simply be credited with a 0% for that period. There is also an option to place the policy’s cash value funds into a fixed account.

IUL Explained

Indexed universal life, or IUL, is a type of life insurance policy that provides both a death benefit and a cash value component.

The IUL Policy

An indexed universal life policy is a type of insurance that allows the policy holder the opportunity to increase the policy’s cash value based on the return on an underlying market index.


Equity Indexed Universal Life Insurance Pros and Cons

While many life insurance policies can provide you with death benefit protection, and some even provide a cash value build-up, indexed universal life insurance (IUL) is unique in that it gives you market-linked growth, as well as protection of principal.  These benefits come with drawbacks, however, such as the cost of life insurance and ‘Caps’ impacting the potential growth of the policy when compared to investing directly in the Stock market.  You must also be healthy enough to qualify for life insurance, meaning not everyone will be eligible.

  • Death benefit protection
  • Market-linked growth
  • Protection of principal
  • Tax-deferred
  • Potential tax-free withdrawals
While these plans may not be right for everyone, you owe it to yourself to see if IUL is right for you?
  • Cost of life insurance
  • Caps
  • Participation rates
  • Eligibility questions
  • Long-term Instrument
While IUL can be a win for some, the costs of life insurance, the need to be healthy enough to qualify and less growth potential than the stock market might mean an IUL is not right for you.
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IUL TAX BENEFITS
Potentially Tax-Free Withdrawals An IRS provision allows for certain types of withdrawals and policy loans to be made, giving the policy owner the possibility of tax-free access to their cash value.
Protect Your Family IUL policies, although they have growth potential, are a life insurance policy first, which means that your family will be protected by the death benefit the policy provides.
No Contribution Limits IRAs and other qualified accounts have contribution limits, and they are not substantial enough for many people.
Tax-Deferred Growth Growth inside an IUL policy is considered tax-deferred and won’t impact the taxes you pay as long as the policy remains in-force.

IS INDEXED UNIVERSAL LIFE INSURANCE RIGHT FOR YOU?

Do you need life insurance?

Indexed Universal Life (IUL) Insurance Products can be great retirement vehicles, potentially providing the owner access to tax-free cash-flow. However, the growth of whatever money you put into an IUL is impacted by the cost of the Life Insurance that these products must maintain in order to qualify for the tax code that provides them the potential advantages they have, such as certain guarantees, the tax treatment of future income, and tax-deferred growth. If you do not have a need for life insurance, make sure the benefits you could receive outweigh the costs that these products have.  See IUL Fees for more information.

Your Tax Bracket

Your tax bracket impacts how much benefit you may receive from an Indexed Universal Life Insurance product.  The tax law that was signed into effect in late 2017 could make Indexed Universal Life Insurance products even more attractive for business owners, as well as married and single individuals, because of the current lower tax rates that are scheduled to increase again in a number of years. What this temporary rate decrease means to you is best illustrated by considering your 401(k) contributions compared to an IUL. Your 401(k) allows you to reduce current income, thereby reducing the amount you pay at TODAY’s (lower) tax-rate, but if you’re scheduled to withdraw money from your 401(k) when the rates will be higher could you benefit from paying taxes today (at lower rates) and then taking tax-free income after taxes are scheduled to rise again? Be sure to speak to an indexed universal life insurance expert about these topics. If taxes are lower today than they will be in the future, then shouldn’t you at least consider paying taxes today in an effort to avoid paying higher taxes if the rates were to rise again in the future?  See life insurance tax benefits for more information

Do You believe Taxes will rise in the future?

According to Investopedia, “In 2026, the changes (in the current tax rates) will expire and (higher) rates will return, absent further legislation…”  This means that your taxes are already scheduled to rise in 2018.  With that knowledge, it would be wise to do everything you can today to capture the current rates and reduce potentially higher tax obligations in the future.  See iul in retirement for more information

Are you eligible for 401k?

You may already be aware that if you are eligible for a 401(k) plan that offers employer matching contributions then generally you should take advantage of that match. When considering an IUL product, you should also consider how your current investments are performing, their tax-implications, and what future income you can expect to derive from these investments. This is where an indexed universal life insurance expert can help you a great deal. Not only can these experts offer you the best IUL products, they may also be able to consult you on your existing retirement savings to help you make the best plan in your specific circumstances.  See IUL As An Investment for more information.

Your Age

Those who are too old or too young may not benefit from an Indexed Universal Life product.  As you consider how your age will impact your suitability for this type of solution, there are two primary questions to ask:

Question #1) Will the cost of insurance, due to my advanced age, prevent the product from performing as desired?

At a certain age, the internal costs of an IUL may be large enough to eliminate the benefits that an IUL policy offers. Also, benefits may also be hindered if you are too close to the time you would need to take funds from your new IUL policy.

Question #2) Does your relatively young age mean that you have a greater risk in an IUL purchase?

Those who are younger tend to have a more volatile earning profile. This may mean that you are at a higher risk of having a disruption in your income that could force you to stop making the desired IUL contributions.  Be very wary about whether or not you will be able to maintain future IUL contributions, because most policies can lapse if you fully discontinue contributions too early. Should your policy fail, any distributions you may have taken can become taxable, and if you are still in the accumulation phase, then any funds you have committed to the product could be negatively impacted.  See indexed universal life insurance pros and cons for more information.

Your Health

Because IUL policies have life insurance expenses, the better your health at the time of your application the less expensive your IUL policy could be.  If you have substantial health issues, then you should talk with the life insurance expert you are working with to determine whether or not a life insurance policy is appropriate for you. See What Is An Indexed Universal Life Policy? For more information.

How long until you retire?

If you are near retirement then an IUL policy may not be the best answer.  IUL policies need several years to grow a cash-value or the primary ‘non-insurance’ benefit of the IUL policy (potential for future tax-free cash-flow) may not accumulate to a large enough value to provide you the income you are hoping to achieve.  See IUL In Retirement for more information.

Your Risk Tolerance

Risk tolerance can have an impact on whether or not you will want to add an IUL policy to your financial plan. If you are looking for safety and security then an IUL policy is something to consider. If you are aggressive and willing to take on a great deal of risks then the guarantees that exist within IUL policies, along with Caps and Crediting Rates that impact how the cash value could increase over time, may make an IUL policy inappropriate for the amount of risk you are comfortable with.  See IUL Crediting Rates for more information.

Your Disposable Income?

For people who have limited disposable income, an IUL policy may not be the best solution.  IUL policies need to have enough cash value accumulated before contributions can be stopped, or the policy may lapse, which could cause all contributions to be deemed worthless. If a person has limited disposable income then they may run into a financial need that could cause them to choose between continuing  the IUL contributions or making a more immediate purchase.  See indexed universal life insurance pros and cons for more information.

Commitment to a Long-Term Savings Strategy

Indexed Universal Life Insurance policies are long-term products and must only be purchased by people who can commit to a long-term savings strategy. If you feel you may need to pull the money out of your new IUL within a year or two then these types of policies are likely not the best solution for you. Work with your chosen financial professional to help determine if an IUL policy is right for you.  See IUL As An Investment for more information.

Is IUL the Right Choice for You?