What is an IUL?
What is an IUL? It is an insurance policy type, an “indexed universal life” insurance. All life insurance provides a death benefit. Similarly, an IUL can provide a death benefit, too. However, because an IUL is “universal” insurance, it may also offer more benefits. For example, policy owners have the possibility of a rate of return with an IUL. Additionally, an IUL has advantages over other universal life policies. You may be able to protect your cash value, yet still, receive a tax-free* income.
An IUL may be part of an overall financial plan. The insurance company holds your money when you have an IUL. Because of this, your money has protection from them. In fact, another reason your money is protected? It isn’t at risk in the market. Instead, you choose an index that links to your potential rate of return. When the index is up, you may see gains. However, when the index is down, your account won’t drop below your principal balance. No matter what the market is doing, an IUL gives you protection for the money you have put in it.
How Does It Work?
Basically, when funding an IUL, some of your money pays for life insurance coverage. The rest of it, minus fees, of course, is the cash value. It is possible for this cash value to get a rate of return because it links to a particular index. However, although an index may perform similarly to the market, it isn’t dependent upon the market. In other words, the S&P 500 index may produce relatively similar earnings as the stocks in the S&P 500. But, your money is not invested directed into the stock market. If the IUL index you chose does go up, you may receive some increase in your rate. However, when the index or market are down, the cash value of your IUL remains the same.
What about choices? Turns out you have many options. In fact, it is possible to “diversify” the money you have in an IUL by selecting a variety of indexes. For example, some of your cash value might be earning a fixed interest. Another portion could be in one index. Yet another piece of the cash value might be linking with a third index. Due to the many possibilities, learning about your unique options is important.
IUL Benefits
During Your Lifetime
Beyond just a death benefit, IULs may help retirees in other ways, too. First, you may have flexibility with an IUL that is not available in other options. Keep in mind that an IUL is a product that insurance companies provide. Because it isn’t investing your money in the market, the laws surrounding it are different than some other retirement products. For instance, 401(k)s and IRAs have contribution limits. However, and IUL has no such requirement. In addition, retirement accounts may also have fees for early withdrawal. But, an IUL does not have restrictions on when the money can be withdrawn.
IULs are also fairly conservative financial products. Even when the market is down, your cash value is unaffected. So, when your IUL index rises, you may see some increases in returns. However, if the index or market drops down, there is no dip in your cash value. For some retirees looking for peace of mind, an IUL may be worth taking a look at. This is particularly true for those who feel the market is unpredictable.
Have a lump sum of money? You can fund an IUL with a lump sum or may choose to fund it over time. When you access your money, you do so without an income tax. In addition, any growth that may happen to your cash value is tax-free.* Some people lock in their potential gains every year with it yet like the idea of being able to pull out money when they need it. Because many variables exist, be sure to talk with us about your individual needs.
For The Ones
You Leave Behind
IUL’s may also help retirees protect their wealth once they are gone. For example, beneficiaries are usually in receipt of an amount higher than your initial contribution when you pass on. In addition, it is possible that the death benefit has increased over time. Also, the probate court is not required with an IUL because it is an insurance policy. Your family or beneficiary gets the death benefit without having to pay tax.
Questions About Benefits
of Life Insurance and IULs?
*Proceeds from an insurance policy are generally income-tax-free, and if properly structured, may also be free from estate tax. Income-tax-free distributions are achieved by withdrawing to the cost basis (premiums paid), then using policy loans. Loans and withdrawals may generate an income tax liability, reduce available cash value, and reduce the death benefit, or cause the policy to lapse. This assumes the policy qualifies as life insurance and is not a modified endowment contract. The Host and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. This content is not intended to serve as the basis for any investment or purchasing decisions, nor does it recommend or involve the purchase, holding, or sale of a security. All figures herein are hypothetical and for illustrative purposes only to explain general concepts. No figure is to be relied upon as being accurate nor a guarantee or projection and is meant only as a partial overview of some relevant features and benefits of general insurance products that may be in the marketplace, and whose availability will be dependent on the State of residence of the consumer, and their individual suitability for the product they are wanting to purchase. Where insurance products are mentioned, any and all guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.