Indexed Universal Life (IUL) Insurance is a form of permanent life insurance that allows the policyholder to build wealth while leaving behind a death benefit for their loved ones. The policyholder’s premium payments are divided into two parts: one is the cost of insurance coverage and the other for the cash value of the policy after fees. The cash value portion of the policy earns interest based on the performance of an underlying stock market index, with returns often linked to Standard & Poor’s (S&P) 500 composite price index, which tracks the movements of the 500 largest U.S. companies by market capitalization. The insurance company may offer a minimum guaranteed rate of return, with an upper limit or rate cap on returns. Compared to fixed universal life insurance policies, IUL is riskier, but it’s less risky than variable universal life insurance.
The benefits of owning an IUL insurance policy include a higher return potential, greater flexibility, tax-free capital gains, no social security impact, and a death benefit. Policyholders have the flexibility to decide how much risk they want to take in the market, adjust death benefit amounts as needed, and choose among a number of riders that make the policy customizable to their needs. For example, they may choose to add a long-term care rider to cover nursing home costs or an accelerated death benefit rider, which pays out benefits if they become terminally ill.
The favorable tax treatment policies receive, both during the insured’s life and upon their death, is also a significant benefit. Interest earned and credited to the policy’s cash values is not currently taxable, and cash values accumulate tax-free within the policy. Upon the insured’s death, proceeds paid as a death benefit are generally received tax-free by the policy’s beneficiary. Furthermore, cash value accumulation from an IUL insurance policy wouldn’t count toward the earnings thresholds for Social Security benefits, nor would any loan amounts that the policyholder borrows.
However, some drawbacks of IUL insurance policies include caps on returns, no guarantees as to the premium amounts or market returns, management fees and the policy being canceled if the policyholder stops paying premiums. These policies are best for those with a large upfront investment who are seeking options for a tax-free retirement. It’s important to thoroughly research any potential firms before purchasing an IUL policy to ensure that they’re among the best universal life insurance companies currently operating.
In conclusion, IUL insurance policies offer an attractive option for those who want permanent life insurance coverage, as well as the potential for cash accumulation through market-linked returns. However, it’s important to understand the risks and limitations associated with these policies before purchasing them, and to work with reputable insurance providers to ensure that your financial needs are met.
These policies can be more complex compared to other types of life insurance, and they aren’t necessarily right for every investor. Talking to an experienced financial professional can help you decide if indexed universal life insurance is a good fit for you.
All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. Life insurance policies contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. A financial professional can provide you with costs and complete details.
Loans and withdrawals, if taken, will reduce the death benefit. Loans and withdrawals from life insurance policies that are classified as modified endowment contracts may be subject to tax at the time that the loan or withdrawal is taken and, if taken prior to age 59½, a 10 percent federal tax penalty may apply. If tax-free loans are taken and the policy lapses, a taxable event may occur.
Products, product features and rider availability vary by state.