Indexed universal life insurance (IUL) is a type of permanent life insurance that offers a death benefit and a cash value component. The cash value portion of the policy earns interest based on the performance of an underlying stock market index, such as the S&P 500. The policyholder can adjust the premium payments, indices and death benefit as needed IUL policies are best suited for individuals who have a higher net worth or have a substantial income. The ideal age to start an IUL policy is between 30 and 55 years old although people younger and older still can apply for them. IUL policies provide greater upside potential, flexibility, and tax-free gains. However, there are some limitations to consider. For instance, IUL policies have ceiling caps on returns, which means that if your index cap is 12% on performance growth and the index you selected does 18% you will only earn 12% credit due to the cap. That still isn't too bad. At the end of the day, properly structured and being consistent with your strategy, an IUL is a great product for upside growth potential and no downside due to a floor of zero. In other words, while market investors can lose in a negative market, you can't. It’s important to note that while index universal life insurance can be a great option for retirement planning, college funding, infinite banking, you must ensure that you have the appropriate type of policy and correct implementation of that policy for the correct results. If you do not buy the right policy type, or if your agent designs the policy incorrectly, it will not work well, and you might end up costing yourself thousands in a poorly executed policy, hence advisors at Taurus Financial Services are trained to structure these policies correctly that maximizes benefits for their clients.
To structure an IUL policy properly, it’s important to minimize the death benefit and maximize the cash value and the indexing strategy. Overfunding an IUL policy means contributing more than the minimum required premium payment. This can help increase the cash value of the policy and provide additional tax-free retirement income. However, it’s important to ensure that the policy remains in compliance with the IRS guidelines for life insurance in order to remain tax-free.
Additionally, IUL policies come with relatively high fees, eating up a portion of the money you contribute but over the long run, the gains out weigh the fees. Compare losing your money in the market vs. some fees with an IUL and never losing, most would take the fees. Here are some Pros and Cons
Pros:
Tax-free growth: The cash value of an indexed universal life insurance policy grows tax-free.
Flexible premiums: You can adjust your premium payments and death benefit as needed.
Upside potential: Indexed universal life insurance policies provide greater upside potential than other types of life insurance policies.
Downside protection: With an index universal life policy, you're index mirrors the market but you're not investing in equities, so you are protected from market losses because there is a built in floor rate of zero.
Permanent coverage: Indexed universal life insurance policies offer permanent coverage as long as premiums are paid.
Lifetime income rider: In addition to loans and withdrawals, you also have an innovative option called the Lifetime Income Rider, which allows you to use your policy to produce a guaranteed stream of lifetime income. This rider is automatically included in your policy if you select the guideline premium test to satisfy IRS requirements. For policies using the cash value accumulation test, this rider is not available. Certain conditions must be met.
Living benefits: There are many unexpected events besides death that, if not properly prepared for, could cripple a family’s finances in a hurry. That’s why your life insurance policy with Taurus Financial Services would have the Care4Life Accelerated Death Benefit Rider* that can help ease the financial strain of a serious medical condition by providing a portion of your policy’s death benefit while you are living.
Business Investment - Businesses can use IUL policies as a way to provide key employees with a retirement benefit.
Policy loan - A great benefit of an IUL is the option to take a loan. Generally, a standard loan is charged a low interest rate, but other loan options may be available, including an option that may allow you to earn interest as if no loan had been taken. the best part is your loan doesn’t need lender approval and has no impact on your credit report. You don't have to payback the loan but that would reduce the death benefit.
Cons:
No guarantees: There are no guarantees as to the premium amounts or future market returns.
Possible limits on annual returns: Indexed universal life insurance policies may have limits on annual returns.
In summary, IUL policies offer a unique combination of benefits and few drawbacks. They are best suited for individuals who have a higher net worth or have a substantial income seeking predictable income growth. To structure an IUL policy properly, it’s important to minimize the death benefit and maximize the cash value and the indexing strategy. Overfunding an IUL policy can help increase the cash value of the policy and provide additional tax-free retirement income, but it’s important to ensure that the policy remains in compliance with the IRS guidelines for life insurance policies.
I hope this helps understanding IULs! Feel free to reach out and book an appointment for a fee consultation and or an illustration with Taurus Financial Services.
Comments