Indexed Universal Life
Earning opportunities that you can pass on
Indexed Universal Life (IUL) insurance is a type of permanent life insurance, which means it has a cash value component in addition to a death benefit. What makes IUL different is the way interest is credited to your policy. In addition to offering a traditional declared interest rate, IUL offers the opportunity to earn interest that is linked to the performance of a selected choice of market indexes.
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Reasons to consider Indexed Universal Life Insurance
Excellent Growth Potential
IULs have serious upside growth potential. This is probably one of the biggest reasons why individuals looking for permanent life insurance will choose an IUL over a Whole Life insurance policy.
If the market index that your policy is tracking increases 10% in a given year your account will be credited around 10%. If the market index increases 20%, your account will be credited with the max or cap, which is between 12% to 15% for most policies. When the index returns a rate that is higher than the cap, the life insurance company keeps the difference.
Tax Advantage
IUL has multiple tax advantages that help in strategizing for supplementing retirement and protecting assets such as Income-tax-free death benefit, tax-deferred accumulation value and tax-free loans.
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For example, say you get $24,000 a year from Social Security, and you take another $40,000 from your IRA each year. You may find yourself in a situation in which the Social Security benefits are taxable, and you’ll end up in a higher tax bracket.
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If, instead of an IRA you had an IUL policy loan for $40,000 per year, your taxable income would be zero because you would be under the base limit. For an individual or family that is living on less than $80,000 per year, you may find that your annual tax savings are in excess of $10,000. That’s a big deal. For those making more, your savings would be even greater. That’s a bigger deal.
Flexibility
Flexible death benefits and premium payments. IULs can be designed to fit your specific needs such as how much coverage you want, how much income you need to supplement in retirement, how much premium you are willing to pay and for how long.
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​It’s primary characteristic is that it allows for the possibility of market-linked cash value growth based on the performance of one or more market indices, subject to caps and floors.
Coverage
IULs can offer lifetime death benefit protection coverage with flexible features.
Guarantees
Index Universal Life insurance is a flexible premium adjustable life insurance plan that participates in the market upside without receiving any of the markets downside. You are contractually guaranteed to not loose your principal balance.
Riders
Riders can be used to enhance to customize the policy to fit the client such as accidental Death Benefit, Living Benefits, Child Term Rider and more.
Limitations
Limited Gains
Increases in the cash value are limited by the insurer. The insurer makes money by keeping a portion of the gains, including anything above the cap. The interest crediting rate cap maximum is typically between 10% and 15%, depending on the product.
Cost of Insurance
The cost of insurance is based on your age, your health rating, and the amount of coverage. For each $1,000 death benefit there is a cost that increases each year as you age. The reason the cost goes up is because you are more likely to die the older you get.
Complexity
IULs can be complicated, particularly if you are comparing it to something as simple as term life insurance. There are a lot of moving parts and many ways it can be designed. This isn’t a big deal if you have a good IUL insurance agent that you trust, but it can be an issue if you don’t have an agent and prefer to just pay the premiums and forget about it.
Common uses for Indexed Universal Life Insurance
Income Replacement
Can provide a few years of income replacement for families in their prime earning years.
Children's Education
Can provide a safety net should something happen to you while you’re saving for your child’s college education. The cash value in a permanent life policy can also be used to fund children's education.
Divorce Settlement
Can be used to satisfy requirements related to divorce, ensuring that alimony and child support can be maintained.
Business Insurance
A lot of big businesses fund executive compensation plans with cash value life insurance policy. It cuts through a lot of red tape and administrative issues that other plans carry.
Advanced Estate Planning
There are situations when an estate may require life insurance for liquidity or estate tax purposes, and depending on the setup, it may be advantageous if the policy is a cash value plan.
Collateral Assignment
A cash value policy can be used to secure loans by the use of the accumulated cash as well as the death benefit coverage amount. Some form of life insurance is generally required for many types of bank loans.
Retirement Income
The use of Arbitrage can be a great advantage. When you withdraw money from your brokerage account or 401k and spend it, the money is no longer invested and working for you. But with cash value policy, when you borrow from your policy for retirement income, the insurer is lending you money and using the cash value in your policy as collateral for the loan. This means that you could continue earning interest on the money you took out to live on enough to cover the loan interest.
Creditor Protection
Some state laws dictate that the cash value in your life insurance is protected from creditors. This is a very important feature for people in the medical profession and business owners alike. Money held in your bank account or brokerage account is generally not protected from creditors and law suits.