Potential Disadvantages of IUL
Even with all of the benefits that are provided with Indexed Universal Life, there are some factors to consider before moving forward with the purchase of an IUL policy. One is that IUL policies can be somewhat complex.
The way in which cash value crediting takes place can involve some “moving parts.” So, before making an IUL policy purchase, it is important that you have a good understanding of how it will work, and how it can meet your specific needs. Discussing your options with an advisor who is knowledgeable about IUL can be beneficial.
As with other types of life insurance, indexed universal life policyholders will incur some fees. While the costs can vary from one insurance carrier to another – as well as on the age and health condition of the insured – some of the fees that IUL policyholders may be subject to include a premium expense charge, the cost of insurance, commissions, and administrative costs. If the policy is canceled during the first few years of purchasing it – or if a certain amount of loans or withdrawals are made – the policyholder may also incur surrender charges.
Some people may also feel that having a cap or participation rate that can limit cash value gains is another potential drawback to IUL policies. For instance, if the underlying index generates a substantial return in a given year, it can be cut short. So, the money that is tied up in an indexed universal life policy could end up underperforming as compared to other investments. Also, because you are not investing directly into the equity market, IUL policies will not pay out dividends to their policy holders.
However, due to the guaranteed floor on these types of policies, in years when the underlying index performs negatively, the principal is protected – and, going forward, there are no losses to recoup before adding to the gains.