Indexed universal life (IUL) insurance policies are one of the Permanent Insurance policies. This kind policies has its own place in the financial planning, protection and building legacy.
Indexed Universal Life (IUL) product works for both protection and builds cash value in the policy. A portion of the policyholder’s premium payments is directed toward annual renewable term insurance with the remainder added to the cash value of the policy after fees are deducted. On a monthly/annual basis, the cash value is credited with interest based on increases in an equity index. These policies leverage call options to gain upside exposure to equity indexes without the risk of losses.
Indexed Universal Life (IUL) are not same as that of Whole Life (WL) policies.
Features of Indexed Universal Life (IUL) products:
When market crashes, the product offers guaranteed guaranteed floors like 0%, 0.75% or 1% depends on the company.
These policies leverage call options to gain upside exposure to equity indexes without the risk of losses. These products are capped at certain rates like 11%, 15% etc. without any performance riders. With performance riders, they have a multiplication factor of 1.7 times or 2.7 times depends on the rider and by the company. Overall, there is a higher return potential.
The policyholders can decide how much protection they would like to have and how much they would like advantage of putting money in the market. These also offers many popular riders for Chronic, Critical, Terminal Illness and Long Term care riders. The policy can be customizable to meet client needs.
Tax-Free Capital Gains:
Stocks, Mutual Funds or Real Estate, Bonds, CDs etc. have capital gain taxes. The Indexed Universal Life (IUL) policyholders do not pay capital gains on the increase in cash value over time unless they abandon the policy before it matures.
Flexibility to Access:
Retirement accounts like 401K or IRA can not be accessed for any other expenses other than retirement until retirement age is met except in special exceptions. If accessed prior to retirement, they attract taxes and penalties. IUL policy cash value can be accessed without taxes and penalties if designed properly. Many policies are designed for College Planning, Retirement Income, Legacy Planning and also use as an estate planning tool.
Tax Free Death Benefits:
The Death Benefit that beneficiaries receive is Income Tax free.
Things you must know before you consider IUL:
There are several critics on IUL policies. are quick to point out. The policy illustrations are generally illustrated with 5-7% return per year. If the policy owner is not paying any more premiums and if the market is performing poorly for many consecutive years, could potentially lapse.
- Caps on returns: All products have a cap on returns. If we compare the IUL returns with the Stock market during the bull-run, IUL cash value will not fare against other investments in the market. Some company products have less than 100% participation rate.
- Guarantees: Whole Life policies have guaranteed returns (approx. 3%) but the IUL is guaranteed at a lower rate like 0% floor or 0.75% floor or 1% floor (dependent on the company and product). In a nutshell, IUL policies have variable returns based on an index and have variable premiums over time.
- Early withdrawals: It takes the first few years to build cash value in the policies. If you have a short term financial need, work with financial advisor to design the policy with upfront losding and buidling wealth quickly before you have access to cash value.
The Indexed Universal Life(IUL) policy is also called as Swiss Army Knife of a Financial Product.
Know more about how the Indexed Universal Life (IUL) and how it can help you in your financial planning.