Indexed Universal Life Insurance: What You Need To Know
Insurance policies are a good way to protect your family and ensure their inheritance. Insurance products also allow your loved ones to pay any debt you’ve left behind, including mortgages, credit cards, and student loans.
For some, a simple life insurance policy with a limited term is more than enough to provide their families with that financial safety net. On the other hand, others may prefer long-term care with extra benefits, such as the ability to grow your money in a cash value account.
If you’d like a policy that combines the best of both worlds, there’s actually a lesser-known third option: indexed universal life. This type of life insurance offers more flexible terms as well as an investment component where you can grow your money on stock market index interest rates.
While this sounds like a great deal, indexed universal life is more complicated than other types of insurance, and it isn’t for everyone. Read our guide to help you decide if this is the right move for you!
What Is Indexed Universal Life Insurance?
Indexed universal life (IUL) insurance is a kind of permanent life insurance policy. IUL comes with a cash value account with a higher growth potential than most other types of permanent life insurance (which is also called whole life insurance). Just like term life insurance/whole life insurance, IULs are enforced by paying regular premiums.
The biggest thing that sets IULs apart is that once the cost of insurance and other charges are covered, your payments go directly to a cash value account. IUL policies allow you to use this cash value for your retirement plan without reducing your death benefit.
Indexed universal life is considered a complex insurance plan due to its variable fees and returns. If you’re considering these types of life insurance products, it’s best to consult with a financial professional that will give you more information about the best options for you.
How Does It Work?
Your cash account grows based on the interest rate of a stock market index such as NASDAQ, Dow Jones, and S&P 500. Your life insurance company may bring in a professional broker-dealer to manage your investments.
If stock market indexes go up, your life insurance account earns more. If the index value drops, you earn less. However, insurance companies set a participation or crediting rate, which is the percentage of gains that actually get credited to your account. A life insurance company can impose both floors (lowest interest rate) and caps (highest interest rate), which prevent large swings in interest.
Many consider this an advantage over investing in mutual funds. Unlike mutual funds, the investment component of an IUL insurance plan locks in the principal amount of your policy, or the amount of coverage you agree on.
This means that, if you should see a year without growth, your initial amount and any previous gains will not be touched. This is often referred to as an annual reset. Plus, with indexed universal life insurance products, any gains are entirely tax-free.
Although they’re similar in many respects, variable universal life insurance policies are different from IUL insurance. Variable universal life invests in stocks and bonds instead of an index – users may earn more, but they’re also at higher risk of losing money. Premiums are also higher with variable universal life.
Again, it’s best to consult with a financial professional to discuss which policy suits you better.
Features Of Indexed Universal Life Insurance
One of the key features of indexed life insurance products is the ability to adjust the monetary components of your policy. Death benefits are adjustable, but it’s much easier to lower them than it is to increase them. To increase a death benefit, you may have to pass a medical examination.
Like whole life insurance, indexed universal policies allow you to access your policy’s principal cash value in case of an emergency. People often tap into their accounts to pay for their student loans, credit cards, personal loans, or retirement accounts.
Premium payments are generally set at a fixed amount, which means that you can’t adjust them. But if you’ve accumulated enough money in your policy, you can tap into your cash value account to pay for your premiums.
Advantages of IUL
The premiums of an indexed universal life plan are much cheaper compared to other forms of permanent or whole life insurance. This is because policyholders can control how much of their account is invested.
Your account grows tax-free. If you earn enough, you can tap into it to pay your insurance premiums, allowing you to stop paying out of pocket.
Your death benefit amounts, though adjustable, are permanent. An IUL policy covers you for your entire lifetime.
The death benefit will not be subject to income tax or death tax.
You can withdraw from the cash value of your indexed life insurance policy without paying any fees, as long as you don’t withdraw more than what you’ve paid into it, which could cause your policy to lapse. To prevent this, you can purchase riders to prevent your insurance product from lapsing in case you over-withdraw or miss out on payments.
You can take out personal loans against your policy, using your cash value as collateral.
Disadvantages of IUL
Over-withdrawing from your cash value life insurance account or taking a loan against your policy could permanently reduce your death benefit. This could also cause your policy to lapse during the insurance term life.
If you terminate your plan early, you can still withdraw what’s called a cash surrender value. Keep in mind that a penalty will be charged for doing so.
Floors may protect your IUL policy from losing money, but caps can limit how much you earn. If your insurance company imposes a cap under a 100% participation rate, you may not get as much as you should be earning.
If you pass away without accessing the cash value you accumulate in your account, the insurer may not release the amount to your beneficiaries. If you want your beneficiaries to access it, you might be able to pay for a rider that allows this.
Is It Worth It?
As with any kind of life insurance, it will depend on you and your unique situation. This is a complex type of life insurance that definitely isn’t right for everyone.
The average person will find it difficult to justify the extra costs alongside the hassle of understanding how it all works. In some cases, you may benefit more from a straightforward term life insurance plan with an outside investment component. On the other hand, if you’re looking for long-term life insurance protection, you may want to check out a standard insurance whole life plan.
However, if you’re competent with stocks or can afford a financial professional to manage your policy, you might benefit greatly from indexed universal life insurance.
The Bottom Line
Indexed universal life insurance is a great way to protect your loved ones while earning through your cash value account, but it’s not for everybody. You can expect fluctuations in payments and earnings throughout your life insurance term, so it might not be the best choice for individuals who want a predictable policy that allows them to be hands-off.
If you do choose to go with this insurance life policy, you’ll want a trusted financial advisor who can manage your accounts best. For more information and assistance, you can contact us at Wesley LLC. We’ll guide you throughout the process and make sure you get the life insurance plan you need!