A man shakes hands after putting money into an IUL investment
IUL As An Investment
Life insurance is most often used to provide financial protection for your loved ones after your death, but some life insurance policies combine death benefit with investment components. Indexed Universal Life (IUL) insurance has a component that could mean the policy is appropriately called an IUL investment. IUL insurance policies enable policyholders to benefit from investment-related components, for instance, allowing the owner to place funds in an underlying market index providing growth potential for the cash account within the IUL policy. IULs also have principal value guarantees, protecting the accumulated premiums that have been paid into the policy. Some of the most common indexes that are used within IUL policy include the Dow Jones Industrial Average (DJIA), EURO STOXX 50, Russell 2000, NASDAQ 100 Stock Price Index (NASDAQ 100), Standard & Poor’s 400 (S&P MidCap 400), and Standard & Poor’s 500 (S&P 500).
The allocation into an index can be done in many combinations depending on the policy holder’s choice and what the IUL product allows. Also, there may also be a fixed account option where policyholders can also allocate their premiums. In other words, the investment is done indirectly via the company’s general account. Before making an IUL investment, it is essential that you consult a financial professional that specializes in Indexed Universal Life insurance before you can invest in a life insurance policy.
How the IUL Investment works
Index Universal Life policies allow policyholders to invest extra funds in the form of life insurance premiums and receive an index crediting based on the performance of the linked-index. The fact that the funds are not invested directly in the stock market means that this type of investment will be less volatile than mutual funds or similar investments.
One of the most exciting things about an IUL investment is that policyholders can also be eligible to receive a guaranteed minimum return regardless of the performance generated by their selected index(es). For example, some of the best IUL companies will offer a guaranteed return of 1% even if the selected index declines in value. Moreover, should the index rise during a given period, the owner of the policy would also see a positive rate of return up to that policy’s cap or based on the policy’s IUL crediting rate. Tax deferral also allows policyholders to accumulate cash on their investment in a faster manner than if that same investment were subject to income or capital gains taxes on an annual basis.
IUL Investments as a Retirement Vehicle
IUL policies often have better living benefits vs. traditional life insurance policies. IUL policyholders can receive a return on their premium while alive through loans on the accumulated cash value or direct withdrawals. This may be a good deal considering the cost of life insurance within an IUL policy is very similar to traditional life insurance policies. As an example of what this means, consider spending $2,000 to maintain a traditional life insurance policy. The same death benefit would likely cost around $2,000 within an IUL – so the cost of your cost for the life insurance death benefit is very similar. A benefit to IUL’s however, is that policyholders are entitled to contribute far more and that added contribution can grow tax-deferred and then at retirement can be accessed in tax-friendly or even tax-free ways.
An IUL investment plan can be a good addition to your retirement portfolio, giving the owner of an IUL policy what is called “Tax-Diversification.” Tax diversification is the act of selecting investments that have different tax implications, providing the owner of these different instruments with the choice of taking income from one or multiple sources based on future tax rates and laws.
Policyholders can direct their premiums into more than one index option while the index performance is tracked by the insurance company. The investor’s interest is calculated using the IUL crediting method and then credited to their cash value account. In instances where there is a decline in a particular index, the policyholder does not earn any interest or would earn that policy’s stated guaranteed rate if it had one. A notable benefit associated with IUL investment is that an investor’s capital is protected from market declines.
In conclusion, IUL investments provide growth potential within life insurance vehicles and give the owner an alternative retirement income stream that may be able to be accessed in a tax-free manner.