More than ever before, people are looking for ways to protect their families and loved ones with products such as indexed universal life insurance.
The outbreak of COVID19 is just one example that triggered an increase in the demand for all different types of life insurance policies. The pandemic put an intense strain on the global healthcare system and lives were unexpectedly and tragically lost around the world.
What Is Indexed Universal Life Insurance?
Indexed Universal Life Insurance also known as IUL is a type of universal life insurance that provides a death benefit, doesn’t expire as long as you pay your premium, and has an investment aspect tied to the performance of an index like the S&P 500.
What’s different about the investment feature of indexed life insurance is that unlike investing directly into an index fund, an IUL policy comes with protection against market losses but there is typically a cap on the maximum return you can earn. Often you can also divide the assets in your policy between fixed and indexed portions.
All permanent life insurance policies are split into two parts: the death benefit (which pays out a sum if you die), and cash value portion that can gain value over time. With universal policies, policyholders can adjust the death benefit within limits, and can use gains from the cash value to pay for premiums.
Interest is also earned on the cash value based on gains in an equity index, either applied monthly or annually. The insurance company uses a set participation rate to determine how much in gains is credited, typically ranging as low as 25% to over 100%.
Insurance companies often market IUL policies as cash value life insurance that offers a way to earn tax free gains that are protected from market losses during a downturn or recession. But it’s important to remember that there are no guarantees on the returns and you could earn more investing independently especially if the markets outperform the caps on gains set in place on the IUL policy.
Indexed Universal Life Insurance: Pros
- Potential for higher returns. These policies leverage call options to gain upside exposure to equity indexes without the risk of market losses. This is a beneficial feature in bear markets.
- Two In One. Another pro of indexed universal life insurance is that it provides a way to combine investing and life insurance through one product. This is a great tool for individuals who aren’t good at regularly investing and saving for retirement on their own.
- Flexibility. IUL insurance provides the flexibility for policyholders to choose how much risk they want in the market, adjust death benefit amounts as needed, and customize the policy with riders.
- Tax free withdrawals. Funds can be accessed through withdrawals or loans if needed and there’s no restriction to wait until you retire. Capital gains on the increase in cash value over time are not taxable as long as the policy doesn’t lapse or is surrendered.
- Enhanced retirement savings. Unlike IRAs and 401(k)s that have contribution limits, IULs can be used as a means to enhance your retirement savings since there’s virtually no limit.
- Permanent life insurance. As long as you pay your premiums, IULs remain in effect.
IUL Insurance Cons
- Complexity. Term life insurance is very straight forward. Products like IUL are much more complex. They have a lot of moving parts that impact the long-term performance of the policy and some people may find them too daunting.
- You could earn more money investing elsewhere. Since indexed universal life insurance policies have earning limits or caps, you can lose out on a lot of gains during bull markets. If you are taking the time to understand IULs you should be savvy enough to have other forms of investing. On the road to retirement you want to take full advantage of earning strong returns on your investments.
- No guarantees. IUL policies have variable, non guaranteed returns based on an index unlike whole life insurance which typically has a guaranteed interest rate.
- Expensive. IUL policies can get expensive. Make sure you understand the commissions and administrative fees that are included in your premiums and will be taken out of your cash value.
Key Takeaways For IUL Insuranc
Indexed universal life insurance policies can provide greater upside potential in bear markets, flexibility, and tax-free capital gains.
Due to caps and no guarantees on performance, you could earn more by investing independently. IULs are also complex products that may be too daunting for some people to fully understand. There may also be expensive commissions and fees that comprise IUL premiums, which reduce the cash value.
In retrospect, I should have taken out an indexed universal life insurance policy back in 2009. The cash value would have grown tremendously over the subsequent decade.
A term life insurance policy paired with an outside investment plan typically is more affordable and can provide a better return for most individuals.
However, IUL policy holders have the advantage of a flexible death benefit and premium payment plan if needed. And the cash value component of a permanent life insurance policy can be useful in certain circumstances like paying off large estate costs, or as a means to pass tax-free inheritance if other assets are large enough to trigger estate taxes.
Get Free Life Insurance Quotes Today
Thanks to technology, it’s easier than ever to compare term life insurance policies. The most efficient and free way to get competitive life insurance quotes is to check online with PolicyGenius. They are the #1 life insurance marketplace where qualified lenders compete for your business.
You can quickly search for policies across multiple carriers through PolicyGenius’s online portal for free. I’ve know the founders of PolicyGenius for years and they have truly build a fantastic resource for individuals.
About the Author: Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school working at Goldman Sachs and Credit Suisse. He owns properties in San Francisco, Lake Tahoe, and Honolulu and has a total of $810,000 invested in real estate crowdfunding.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.