Do you need life insurance with an investment focus? In this article, we dissect how indexed universal life insurance functions.
Indexed Universal Life Insurance: What is it?
One form of permanent life insurance is indexed universal life insurance. Paying your premiums on time will remain effective until the policy’s maturity date. In many cases, IULs expire when the policyholder turns 121 years old.
The cash value component of indexed universal life insurance rises and falls in tandem with an index such as the S&P 500. The insurance firm invests in risky assets like bonds and mortgages while the cash value grows and falls in tandem with an index.
You or the insurance company can take out a loan against your policy’s cash worth. Your beneficiaries will receive a death benefit if you have a life insurance policy that pays out when you pass away; however, the death benefit will be reduced by any outstanding loans or withdrawals from the cash value.
Indexed universal life insurance: A practical explanation
A portion of the money you spend on premiums for permanent life insurance goes toward the death benefit. The remainder covers policy maintenance and the price of providing you with insurance. A cash value account is funded with the remainder.
Your beneficiary receives the death benefit free of taxation. In most cases, the cash value is not included in the life insurance payout.
Cash value accumulation
An IUL policy’s cash value is less susceptible to market swings than a stock portfolio. For instance, market fluctuations play a more prominent role in variable universal life insurance.
Instead, an IUL policy‘s cash value is linked to an underlying index, like the S&P 500 or the Nasdaq composite, and its performance. The insurance firm will calculate the credit to your account based on the rate of return associated with the index.
You may have single or multiple index options depending on the insurance provider.
Flexible death benefits and premiums
Your premiums and death benefit can be modified as needed. The account value could cover your premiums if it grows large enough.
The insurance premium and policy expenditures will still be deducted automatically from your cash value account on the same date each month, regardless of whether you make a premium payment. As long as the regular premiums are taken from the cash value account, the insurance will remain in force, and the policy provider will pay the death benefits.
What occurs upon maturity of an indexed universal life insurance policy?
When a life insurance policy (including IUL) reaches its maturity age, the policyholder is entitled to receive the death benefit outlined in the policy. This benefit may be as low as $1 if the policy’s cash surrender value is the only value.
In contrast, the benefit paid out at maturity in other insurance is the same as the full death benefit. This payment would typically be exempt from federal income tax under Section 101 of the Internal Revenue Code; however, the IRS does not recognize it as a death benefit and treats it as regular income.
Are taxes levied on Indexed Universal Life Insurance?
You can access an IUL policy’s cash value; however, there are some circumstances in which doing so will result in taxes. For example, you can make tax-free withdrawals up to your basis (the total amount you’ve contributed to the insurance). In contrast, you would incur income taxes on the percentage of your withdrawal corresponding to your investment gains if you cash out your policy before it matures.
Should you get Indexed Universal Life Insurance?
Individual variable insurance policies (IULs) may be a viable option for those who desire a piece of the market’s upside without taking on all the risk of a downturn.
Also, for customers who have maxed out their eligible retirement plans, an IUL may allow them to contribute with fewer age limits and develop capital value on a tax-deferred basis.
Cost of IUL
The cost of IUL varies from company to company and policy to policy. The premium you pay isn’t the only “expense” of having an IUL. The expenses associated with indexed universal life insurance are surrender charges, insurance premiums, administrative fees, and sales commissions. Your premiums and the amount of cash value you can accumulate are both influenced by these factors.
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Mike was born in Chicago, Illinois on August 13, 1946. He was brought up in the
suburb of Skokie on Chicago’s northwest side and graduated from Niles Township (
East ) high school In 1964. Two years later he joined the US Air Force in November of
1966. After 2 years of Intense training he volunteered for Viet Nam and was sent to
Bien Hoa Airbase, which was 25 miles from Saigon, the nation’s capital. He
volunteered for a number of especially dangerous missions on his days off, such as
flying as a door gunner on a US Army helicopter and as a technical assistant on a
psychological operation on an Air Force O-1E observation aircraft. Capping off his
impressive accomplishments was winning the coveted Base Airman of the Month for
March 1969, a feat which was featured in the Pacific Stars And Stripes newspaper
read by every service man stationed in the Pacific theater of operations. After his
Viet Nam tour of duty he was stationed at Luke Air Force Base in Glendale, Arizona
where he met and married his wife, Lequita.
He graduated from Arizona State University in May, 1973, and after a 30-plus year
career as a financial advisor he joined a number of service organizations including
Easter Seals and Valley Forward, sponsor of EarthFest. He was also involved with the
National Federation of Independent Business and became the longest-serving
chairman of the Leadership Committee ever. He spoke before the ( AZ ) House Ways
and Means & Senate Finance committees. He then joined Disabled American
Veterans ( DAV ) in September of 2015. He rose quickly through the ranks and
became Chapter 8 Commander in May of 2019 where he served with Distinction for 3
years before being “ termed out”. The next year, as Vice Commander, he won the
title of National Champion Recruiter!