Indexed Universal Life Insurance (IUL) is comparable with traditional Universal Life. However, there are several additional benefits that make IUL a more efficient investment tool. When it comes to IUL, the policyholder may choose to invest in a fixed account or into an equity index account.
There are other choices to be made by the policyholder when the time arises to select the type of index in which to invest. These choices could range from the NASDAQ 100, all the way to the S&P 500.
All life insurance/investment products have advantages and disadvantages that need to be taken into account before making an informed decision regarding whether or not the product is the right fit for an individual’s and their family’s needs.
- Higher Market Earnings – The potential earnings from an IUL are usually higher than traditional cash value life insurance policies because the available cash can be placed in an index account such as the S&P 500. Many policies of this type have features built-in that compare multiple indices and based on numerous factors, will lean more heavily towards one of those performing better than others.
- Guaranteed Floor – A standard indexed universal life policy has a floor that dictates the minimum interest that will be earned annually on the policy which guarantees that the account will not decline from the previous year’s earnings. The benefit to the policyholder is that their earnings are protected from declines in the market because the decline below the established floor will be absorbed by the insurer issuing the life policy.
- Tax Advantages – A tax-deferred basis is how the cash value is accumulated in the account. Because of this, the death benefit is paid to the beneficiaries of the policy free of any tax liability whatsoever. The cash account associated with this type of policy also has the ability to be accessed by using partial surrenders that are tax-free up to the amount of premium paid into the policy. Or as these are more commonly known as policy loans. The earnings on this type of policy become taxable at the normal tax rate for the policyholder once the basis (premium paid in) has been exhausted.
- No Cap on Premium Input – Traditional universal life insurance has a cap on the amount of cash that the policyholder can invest in the policy. IUL has no cap on how much the policyholder can invest. Because of this, the cash account has the ability to grow at a significantly faster rate than in traditional life insurance policies. This key feature allows the IUL policy to be a perfect location for parking money to be rolled over from an IRA or 401(k).
- Flexibility – The IUL is quite similar to traditional universal life insurance policies. A key similarity in the product allows the policyholder to change the periodic premiums and even the face amount of the policy at his or her discretion. In many cases with these types of policies, death benefits can be reduced in the later years of the policy. This is due to the debt of the policyholder becoming significantly less over time.
- Guaranteed Death Benefit – So long as no premium payments have been missed or gone unpaid, the indexed universal life insurance policy will provide a guaranteed death benefit for beneficiaries. The IUL also offers the policyholder the ability to elect to pay premiums until age 65 and then receive coverage up to age 100 or beyond if they so choose. The early payoff option is to be determined at the inception of the policy to allow for adequate premiums to be paid into the policy over time.
- Reduced Fees – The fees associated with the IUL policy are determined by the death benefit instead of the cash account. Because of this, fees tend to be lower compared to most mutual funds. The fees that can be charged have the ability to greatly impact the net earnings of an IUL policy during an index period within the policy.
- Earnings Cap – There will be a cap placed on the cash account associated with the IUL policy by the insurer that can limit the earnings credited to the account in comparison to the actual earnings that could be earned in the marketplace at large. A key point to note about IUL policies is that neither capital gains nor dividends are included in the earnings credited to the policy. In these instances, the policyholder should be aware of the earnings cap in place in advance in order to understand the significance of the maximum amount that can be earned during the index period of the policy.
- Mortality Charges – Mortality charges are how much the exact cost of insurance is. This cost figure is not guaranteed. The death benefit of the policy is based on an annual renewable term which increases each anniversary that the policy renews. The mortality charges for life insurance are deducted from the cash account associated with the policy and will increase with each anniversary of the policy. Mortality charges for the death benefit are not guaranteed in any way on this policy type.
- Participation Rates – The cash fund for IUL policies is not directly invested in the index. Because of this, the insurer controls the actual participation rate of the fund associated with it which is usually 80% of the index earnings. Practices such as this, prevent the policyholder from realizing the full consequence of the gains in the cash account.
- Front Loads – Some IUL policies are set up in a fashion so that the fees are loaded in the front of the initial investment, which means that it could take the policyholder a significant amount of time to actually begin to accrue significant cash because the fees are being paid from the cash account associated with the policy. In other cases, the fees within the policy can be spread out over a longer period so that the impact on the policy at any given time will usually be much less significant.
Without a doubt, there are advantages and disadvantages to every type of investment product and life insurance product. The Indexed Universal Life policy may very well be the best product to serve your retirement plans and cover your life insurance needs simultaneously. The IUL life insurance product is considered by many financial professionals to be a perfect component of any well-balanced retirement program and should be considered by many different types of consumers.
With each client, Structured Wealth Strategies will develop a retirement income financial plan that maximizes assets, minimizes taxes, and guarantees the most inflation-adjusted income possible utilizing the fewest amount of assets.
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My name is Curt Gibbs and I invite you to contact our office to discuss your financial situation. (800) 595-1130