Many clients that are interested in IUL products wonder if indexed universal life is a good or bad choice. The answer to that question is an IUL is neither. For some people it is the best life insurance option available. For others, there are better choices. One of the top ways to know if indexed universal life is the right product for you is to continue reading as we demystify the IUL policy.
What is Indexed Universal Life Insurance?
Indexed Universal Life Insurance DEFINITION: permanent cash value life insurance that allows you to allocate your cash value to different market indexed accounts or a fixed account. The cash value is not invested directly into the market, rather you are participating in the movement of the index based on a formula that tracks the gains (or losses) of that particular indexed account. Your policy typically has a cap and a floor. The cap limits your potential maximum returns and the guaranteed floor limits your potential loss.
Five Incredible Benefits of Indexed Universal Life Insurance
America is the land of options and variety. The “melting-pot of the world” is truly a place where just about every consumer product on the market has enough variety to thrill even the most finicky among us. Manufacturers break their backs to produce the variety that is demanded by their adoring public.
Those in the life insurance industry are no different. The number of options available to the consumer of life insurance is rather amazing. The different types of life insurance available include Term, Whole Life, Universal Life, Variable, Indexed, Global Indexed, and more. For some out there, the Indexed Universal Life policy is just the right color and flavor to meet all their needs, and in many cases, it may exceed them.
Indexed Universal Life (IUL) has many benefits, the most important of which is obviously the death benefit, which is common to all forms of life insurance.
But without presenting the most common and well-known benefits of an IUL, here are the five elements of the IUL that many have not heard before. These features might possibly make this “flavor” of life insurance, a personal favorite.
You may also be interested in reading about the Indexed Universal Life Insurance Pros and Cons, where we go into more detail and list our current favorite IUL policies and companies.
Indexed Universal Life Insurance review
[Top 5 Benefits]
- Tax Deferred Growth
- Tax Free Access to Cash Value
- Protection from Law Suits
- No Minimum Age or Income Requirement
- Avoids Probate
As with any good retirement plan, the ability to defer your tax obligation on the growth of your investment is a significant benefit. But how does this work in an IUL?
As mentioned previously, the IUL has a cash value that accumulates over the life of the policy. A portion of your premium is invested in an Indexed account (typically the S&P 500) and that account grows over time. The growth of this account is tax-deferred, which means that you will not pay tax on the gain in this account until you choose to withdraw the money above your basis (or close the account).
In addition, you will always be able to withdraw money from the cash value up to the amount of premiums you’ve paid into the account, because this represents the after-tax money that you have already supplied to the policy.
But would you believe there is a way to access an equivalent amount of money without the tax liability? Believe it. There is.
This isn’t some sort of scam and it’s completely legal. Insurance companies have provided a way for individuals to take out a loan on their current cash value at rates that are virtually zero. This is called the Policy Loan Provision, or in some cases the Wash Loan Provision.
The policy loan provision may be the single most interesting aspect of an Indexed Universal Life policy. The way it works is as follows:
Let’s say you want to withdraw $10,000 from your cash value. But the total amount of premiums paid is only $7,500. The first $7,500 would come to you tax-free because it represents after-tax money you already paid into the policy. The remaining $2,500 would be given to you as a loan, and the rate would vary, but could likely be around 3-4%. At the same time the insurance company withdraws $2,500 from your cash value as collateral and puts it into a separate account earning 3%.
That’s right, you are earning back the percentage that you are being charged (in some situations there might be a small percentage fee, but it is usually virtually zero). This loan can stay in place until you die, and at that time the loan is paid off by the collateral, and the death benefit is paid to your beneficiary.
In this way, policy owners have tax-free access to their cash accumulation. However, keep in mind that if you ever choose to close your account, or simply withdraw your funds, the growth of your account would be taxed.
In most states, (not all), index universal life insurance cash value is protected from lawsuits. You’ll have to look into this for your home state, but it is a huge benefit to those with significant income that work in professions where litigation is common.
Protection from lawsuits is one of those aspects of an IUL that is rarely discussed or mentioned. That’s primarily because insurance agents don’t actually know much about the legalities involved. In those states where the life insurance cash value is protected, the law protects the cash value from bankruptcy, lawsuit, or any other sort of judgement. Do your homework on this one, but for many, this feature alone makes the IUL the “flavor” for them.
Unlike the tax-qualified plans of the SEP IRA king, an IUL has no age requirement and no income requirement.
What does this mean?
First and foremost, it means that you can start your life insurance for your child shortly after birth (well before they’ve earned any income). Due to their age, there is no medical exam, and the premium is obviously about as cheap as you can imagine.
If you choose to overfund the policy, you can give your child a nice college graduation or wedding present 20 to 30 years later that has some significant cash value.
It’s a great way to kick start the savings for your children, and they get the benefit of taking over the plan whenever you choose to hand it to them.
In the unlikely event that a child passes away, the death benefit can be used for final expenses, or if the child requires some costly medical treatment, the cash value can always be withdrawn or borrowed against tax-free to help pay for the medical expenses.
The IUL is a contract that has a named beneficiary and as a result the death benefit is paid out within days or weeks of the death of the policy holder.
The benefit does not go through the lengthy and costly probate process, and the beneficiary is free to use the cash benefit immediately upon receipt.
In addition, the death benefit is completely tax-free***, so no need to worry the beneficiary with complicated tax repercussions or scenarios. This is why Indexed Universal Life Insurance is a great estate planning tool.
***Note: the current federal estate tax exemption is $5.4 million and $10.8 million for a married couple. If your estate is valued above this than you should consider an irrevocable life insurance trust.***
Indexed Universal Life Review Conclusion
As you can see, the Indexed Universal Life insurance policy has some very unique and interesting characteristics, and these are perhaps the features that are discussed the least.
If you are interested in learning more about Indexed Universal Life, or discussing the possibilities of pursuing an IUL for you and your family, please give TermLife2Go a call. We’d be happy to answer any questions you might have, and provide the options that cater to your financial planning needs.
Our number one priority is to find you the best product that meets your specific needs.
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