It is always important to understand the pros and cons of any life insurance or investment product before you invest in it. Researching IUL pros and cons is no different. By doing this, the policyholder can determine whether or not the product meets their needs. Indexed Universal life insurance policies have their benefits and shortcomings like any other policy. The following are some of the IUL pros and cons we believe should impact whether or not you purchase an IUL or not;
What are the largest IUL Pros and Cons?
Pros
- Cash Accumulation
- Market Loss Protection
- Gains Locked In
- Tax-Free Cashflow
Cons
- Costs
- Due Diligence
- Cap Rates
- Crediting Rates
Indexed Universal Life Insurance Benefits: The "Pros" of an IUL
Death Benefit
As a permanent life insurance policy, IUL insurance offers policyholders a tax-free death benefit for the policy’s beneficiaries. The policy guarantees your beneficiaries will receive some additional financial security when you pass on. Life is so uncertain, and it is a beautiful feeling to know that your family will be covered if something happens to you.
Cash Accumulation
IUL cash value accumulation can occur within your IUL policy as the Index grows and the credit rates of the policy take hold. The cash accumulation within an IUL enables a policyholder to increase their retirement security as the product makes it possible for your policy’s cash value to grow tax-deferred. Cash value growth is achieved through an Index Participation Rate (IUL crediting rate) or a Fixed Account percentage. As an individual continues to make their premium payments, a percentage of their premiums are deposited into their cash-value account, which tends to grow over time. Further, the growth of an IUL vs. Whole Life products, it is likely that the IUL will receive more growth, in the long run, than whole life products due to the nature of the crediting strategies.
Market Loss Protection
IUL Policyholders do not need to worry about market losses as the policy ensures that they are well protected. IUL clients are guaranteed against negative index performance, which means should the index decline in value, that loss will not translate into a loss for the policy owner. Some IUL Products also have a guaranteed minimum rate of return regardless of the market performance.
Gains Locked In: The gains accumulated after a crediting period (typically one year) can be locked in during an annual reset. Once ‘reset,’ the new cash value will be guaranteed, and any future IUL crediting will be applied to this new, higher value.
Tax-Free Cashflow
Indexed Universal Life insurance owners have the opportunity to enjoy the tax-free cash flow. IRS tax codes give insurance products a unique benefit when it comes to retirement planning. IUL insurance policies, being an insurance policy, benefit from these IUL tax provisions, and the added growth potential of the index crediting rates mean that through tax-deferral and potentially tax-free withdrawals in the future, an IUL policy can provide a significant benefit to its owner, especially regarding retirement income planning.
Is IUL The Right Choice For You?
Indexed Universal Life Insurance Detractions: The "Cons" of an IUL
Costs
Index Universal life insurance, unavoidably, has the cost of an insurance policy. The cost of universal life insurance can be larger than Term insurance. The reason universal life insurance is more expensive than term insurance, for instance, is that universal life insurance is guaranteed to be there when you die as long as your premiums are paid. Term insurance is priced less expensively because it is structured to lapse before most owners need it. This added cost is regrettable, but knowing you will be covered may offset the added cost.
Due Diligence
Learning about an IUL policy can require a fair amount of due diligence before purchasing the best IUL product for you. Life insurance costs, loan provisions, crediting rates, and caps will all impact how satisfied you are with your IUL policy and how well it works for you. Performing this due diligence will need to be done by you or even better, the highly-rated IUL professional you choose. If you are going to rely upon a financial professional to help you through this process, a way of making the due diligence less cumbersome is only to use a financial professional who has demonstrated themselves to be an IUL expert.
Cap Rates and IUL Crediting Rates
These items are less of an issue if you stick to the best IUL companies, but Cap Rates and IUL Crediting Rates will impact the performance of your cash value within an IUL policy. Caps will limit the growth potential of an IUL policy, but eliminating loss potential makes this less important. IUL crediting rates similarly have an impact on how your cash value grows, so make sure you and your chosen financial professional look for the best IUL products. These products will have generous crediting rates along with the benefits previously discussed
In conclusion, like any investment, IUL pros and cons exist. Review the items above, decide whether or not the benefits outweigh the potential drawbacks, and make sure you are working with an IUL expert to perform a thorough review of your needs and the available IULs before moving forward.
