Is IUL a good investment? Traditionally, life insurance is used to provide financial protection for your loved ones after your death. Some life insurance policies, however, combine a death benefit with investment components. Indexed Universal Life (IUL) insurance has a cash accumulation 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 guarantees, protecting the accumulated premiums that have been paid into the policy and any growth from prior years. 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 the IUL product. Also, there may be a fixed account option where policyholders can also allocate their premiums. In other words, the investment is made indirectly via the company’s general account. Before making an investment into an IUL policy, you must consult a financial professional that specializes in Indexed Universal Life insurance. A highly-rated IUL expert can help you decipher which IUL company offers the best solution for you, and can also help you structure your IUL policy in a way where you can achieve your goals with the smallest outlay of capital.
Is IUL The Right Choice For You?
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 variable life insurance products.
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 policy owner would also see a positive rate of return up to the cap rate or based on the IUL policy’s 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 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. Consider spending $2,000 to maintain a traditional life insurance policy as an example of what this means. The same death benefit would likely cost around $2,000 within an IUL, so 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. That added contribution can grow tax-deferred and then at retirement can be accessed in tax-friendly or even tax-free ways.
In simple terms – although an IUL policy may allow or even require you to contribute more on an annual basis – the cost to maintain the death benefit can be the same as other policies allowing the residual contribution to fund a cash/investment account that provides the owner a benefit in the future.
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 with different tax implications, providing the owner of these different instruments with the choice to take 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 insurance company tracks the index performance. 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.
