What is Equity Indexed Universal Life Insurance?
For most individuals and families, purchasing life insurance can be a complicated task especially when you consider the ramifications of buying a product that doesn’t resolve the financial risk you are attempting to mitigate.
With many product options at our fingertips such asterm insurance,whole life, or various universal life products, it’s important to understand how each may or may not be the best solution for our circumstances.
Equity Indexed Universal Life Insurance is one of the options that many passes over because of its complex design but this life insurance product can accomplish two very important things. Provide permanent life insurance protection and accumulate wealth over time.
What is Equity Indexed Universal Life and How does it Work?
Equity Indexed Universal Life (EIUL), also known as Indexed Universal Life or IUL is a life insurance product with a cash accumulation component. It is similar to Variable Universal Life but considered to be a safer investment with minimal risk.
How it Works
Similar to other permanent life insurance products, the premium you pay into your Equity Indexed Universal Life policy does more than just pay for the cost of your life insurance and any associated fees.
Unlike variable universal life, a product that allows the policyholder to actually invest a portion of their cash value account into a selection of stocks and other funds that present an assortment of risk profiles, EIUL insurance provides its policyholders the option of depositing the policy’s cash value into an equity index account that pays interest-based of the performance of the index instead of directly investing the money in the market.
If the index or indices your account is linked to has an increase, your cash account will be credited based on the increase but subject to the Cap rate on your account.
Here’s an example:
What if an Index loses Money?
One of the best benefits of the EIUL policy is that you will not lose money in your index account if the market performs poorly and your index account(s) lose money. Your EIUL policy also contains a Floor rate (usually zero) which represents the minimum amount of interest your account would be subject to.
Here’s an example:
Other Benefits you Should be Aware Of
An Equity Indexed Universal Life policy comes with substantial tax benefits. In fact, these tax benefits are what make the EIUL policy a key product selection for retirement planning.
Since the premiums paid into your EIUL policy have already been taxed, your earnings in the index account are tax-deferred. But even more importantly, you can take funds from your cash account on a tax-free basis by using policy loans. And, since your insurance policy is not considered an investment product by the IRS, there are no penalties if you take funds out before age 59 ½ and there is no requirement to take minimum distributions at age 70 ½.
If you are like most policyholders and plan to use the accumulated wealth in your policy for retirement income, you would simply begin taking annual policy loans from your cash account without having any income tax liability because the money you will receive is not considered income by the IRS.
Instead of repaying your loans, the insurance company would simply deduct the unpaid loans from the death benefit in your policy.
The absence of liquidity or the lack thereof is one of the major causes of bankruptcy. When you have funds available to you that will not be taxed or subject to early withdrawal penalties, it allows you to weather a financial storm and then get back to a normal life.
Having access to your accumulated wealth without penalty or taxation can make the difference of weathering a financial storm or succumbing to it. As a matter of fact, most hard-working people who cash in their traditional retirement plans like a 401(k) do so because of loss of employment.
Then, on top of that, your federal government is going to tax you on the money you use to get through the crisis and penalize you for taking YOUR money out of YOUR retirement account.
Should I only use Equity Indexed Universal Life for Retirement Planning?
Although Equity Indexed Universal Life is a great retirement planning tool, most financial professionals will recommend that you diversify your investments if at all possible. For example, your 401(k) is a great tool for accumulating wealth for retirement as long as your employer is matching your contributions.
Other downsides to the 401(k) are the annual contribution limits, early withdrawal penalties, required minimum distributions, and the taxes you must pay when you withdraw funds from your account.
We believe that you should never pass up free money (the amount your employer will match), why not invest into your 401(k) like everyone else but only the same amount your employer invests. Once you reach that threshold, start diverting those investment dollars to your EIUL where it will likely earn more than your unmatched 401(k) money and not be subject to the constraints and tax liabilities that are the result of tax-hungry legislators.