Why Many People Prefer Indexed Universal Life Insurance (IUL)

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It is almost impossible to plan your family’s future without considering some form of insurance. In case you want to have permanent life insurance that allows you to build your cash account over the long term, then going for permanent life insurance such as Universal life insurance might be a good option for you.

According to the National Association of Insurance Commissioners (NAIC), Indexed Universal Life (IUL) Insurance not only provides the potential for growth based on the market but also offers security against losing value if the market falls. If this sounds good to you, then this type of insurance is an option that you would like to give serious consideration.

What Is Indexed Universal Life Insurance?

Indexed universal Life Insurance, also commonly referred to as IUL, is one of the forms of permanent life insurance. This means that it comes with a cash value component on top of a death benefit. The money deposited in your cash-value account is expected to earn interest premised on a stock market index picked by your insurer. As much as the funds may not earn any fixed rate of interest, they usually come with an interest rate guarantee.

How Does IUL Compare To Other Insurance Products?

When shopping for suitable life insurance, you have a wide range of options to pick from. These may range from low-priced term life insurance policies to costly permanent life insurance policies. However, if you specifically want the latter, then the available options are fewer.

The two most popular permanent life insurance options are Indexed Universal life Insurance and Whole Life Insurance. Each of the two has its unique features; hence a proper grasp of how they differ can help choose what may be best suited for you.

Indexed Universal Life Insurance vs. Whole Life Insurance

How Similar Are They?

Being permanent life insurance policies, IUL insurance, and Whole Life Insurance have two main similarities: both come with the potential for building cash values and securing lifelong coverage.

  • Potential Cash Value

Both offer cash value, which can accumulate and increase tax-deferred inside your policy. These funds might later prove to be very helpful to you in many ways, including acting as an educational fund, a supplemental for your retirement income, or even paying for the ongoing expenses in your policy. This can be achieved through withdrawals or policy loans.

  • Permanent Coverage

For as long as you continue making timely payments of the requisite premiums, your policy will remain valid. Coverage will typically last a lifetime -- irrespective of how long you may live. This ensures that your beneficiaries receive a death benefit to help them meet their living expenses.

How Different Are They?

One major area where IUL and Whole Life Insurance significantly differ is in their premium payments. Premiums are the payments that you make, either monthly or annually, to your insurance company. They largely determine the type of policy that is most suitable for you.

With Whole Life Insurance policies, you usually get a premium schedule from the time you begin the coverage. So long as you make your premium payments on time, your coverage remains valid, and your cash continues to grow as indicated. However, compared to IUL insurance premiums, Whole Life premiums usually are higher at the commencement of your policy.

On the other hand, IUL premiums are usually adjustable. You are even allowed to temporarily skip premiums if there is sufficient cash value in your policy. Nevertheless, if your cash value drops or you pay too little into your policy, you may be forced to pay higher premiums in subsequent years to keep up with the costs of insurance.

How Does It Compare To Annuity?

Professionals and high-income individuals usually regard indexed universal life products as being more flexible than variable annuities. However, the two have some similarities. They both help you in building up a retirement fund. They both also come with upside and downside risks. While Indexed universal life policies and variable annuities are likely to enjoy higher returns than the fixed-retirement alternatives, you sometimes risk losing earnings over time, depending on the performance of the investments.

Also, variable annuities entail investing contributions into mutual funds, while equity IUL earns interest depending on the growth of a stock market index. If your index or mutual funds dwindle, both choices will give you decreased earnings, hence reducing your retirement fund.

On the other hand, the two differ significantly. Variable annuity remittances are usually invested in mutual funds. Your insurance company will go ahead and make those investments according to your wishes. Since underlying securities are made of bonds and stocks, an indexed universal life policy earns you interest as a consequence of any growth in a stock market index.

If you transform variable annuity to monthly income payments, you can request assured lifetime payments. In IUL policies, you can contribute as much as you wish without maximums, and withdraw the money as tax-free loans whenever you need it for retirement or business.

What are its Living Benefits, Cash Value, and Retirement Value?

  • Living Benefits
  • Interest rate guarantee: policies include an interest rate guarantee; hence a minimum interest rate is always paid even when the index produces lower returns. However, interest rates usually are also subject to a cap.
  • Adjustable premium payments: your policy will ordinarily specify a scheduled premium for you. However, when you have enough money in your cash-value account, the funds may help in paying your premiums. 
  • Adjustable death benefit:   death benefits are generally adaptable with the IUL policy, and you can easily access them or typically lower them any time. However, increasing the death benefit may need you to pass some medical examinations.

While other financial vehicles direct you into what you can use your savings on, for IUL, it can be your first car, college education, down payment on a house, or for a wedding.

Your child instantly covered with permanent life insurance with living benefits, simply as a side benefit to using IUL as your vehicle in savings.

  • Cash Value

With good results, Indexed Universal Life insurance makes it possible to accumulate a substantial amount of cash value or even pause payment of premiums for some time. It also offers access to cash value whereby in case of an emergency, you can borrow from your IUL insurance policy, though this might attract interest charges.

Perhaps the best thing about it is that the performance of your IUL policy directly reflects the performance of the stock market index while implementing a 0% floor in a market cap that is ordinarily around 10%.

Hence your cash value participates in the growth of the market up to the zero cap then sits safely on the side-lines when the market goes down. Here, you forgo some of the upsides to mitigate all the downsides.

It is also possible to make withdrawals from your cash-value account. However, this may permanently lower your death benefit. If you don’t maintain a significant balance in your cash-value account, any withdrawals may risk causing you a policy lapse.

IUL cash value also comes with more unique side benefits such as:

  • Downside protection
  • Tax-deferred growth
  • Tax-free access
  • Protection from lawsuits
  • Concealment from FAFSA
  • Retirement Value

For several years, retirement planning has been limited to choices that fall on either of two sides: safe or risky. This fact has always forced financially-savvy people to invest in multiple products that are either considered safe or risky to spread the risk. However, there is still some way to capture the upside potential of a risky product and the downside protection of a safe product in a single solution. This is precisely what IUL offers.

One of the biggest strengths of IUL is its ability to harness compound interest, which it uses to potentially generate huge amounts of the non-taxable cash value within the policy. This cash value can be accessed later in life and be used to fund a happy, healthy non-taxable retirement. This enables the accumulations of cash value to become the best supplement to other sources of retirement income, making your life after retirement more manageable and stress-free. 

Tax Advantage

The cash value accumulates typically tax-deferred while the death benefit is also tax-free for beneficiaries. Any loans made against the IUL insurance policy are, in most cases, tax-free as well. Equally, your premiums are paid with after-tax dollars; hence partial or full withdrawals (normally up to the amount equivalent to your premiums) are also tax-free.

This presents you with a considerable tax advantage. What is more, the IRA code of tax exemptions for life insurance ensures that your cash value becomes a suitable way to create more income in retirement. This is something 401K or IRA can simply not offer. 

References

https://www.naic.org/cipr_topics/topic_universal_life.htm
https://www.allstate.com/tr/life-insurance/universal-life-insurance.aspx
https://www.protective.com/learning-center/life-insurance/policy-types/compare-and-contrast-indexed-universal-life-vs-whole-life-insurance/
https://www.investopedia.com/articles/personal-finance/012616/index-universal-life-vs-whole-life-insurance-how-they-compare.asp
https://finance.zacks.com/variable-annuity-vs-indexed-universal-life-9038.html

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