Indexed Universal Life Insurance (IUL)

Overview

• Indexed Universal Life (IUL) insurance is a type of universal life insurance.
• Provides both a cash value component and a death benefit.
• Cash value can earn interest by tracking a stock market index like the Nasdaq-100 or S&P 500.
• Offers an interest rate guarantee which limits losses but may cap gains.

Key Features

• Flexible Premiums: Adjustable premiums similar to universal life insurance.
• Cash Value: Allows potential for cash growth through an equity index account.
• Interest Rate: Guarantees a minimum interest but caps potential gains.
• Policyholder Control: Option to allocate cash value between fixed and indexed accounts.
• Permanent Coverage: Lifelong coverage when premiums are kept up-to-date.

How It Works

• Premiums can be adjusted, and policyholders may skip or underpay at times.
• Cash value is credited with interest based on increases in an equity index.
• Borrow against accumulated cash value, with loans deducted from the death benefit if unpaid.

Pros

• Flexibility: Premiums and death benefits can be adjusted.
• Tax Deferral: Cash value grows tax-deferred.
• Investment Flexibility: Control over risk in equity-indexed accounts.
• Permanent Death Benefit: Not subject to income or death taxes.
• Less Risk: Not directly invested in stocks, thus lower risk.
• No Contribution Limits: Unlimited annual contributions.

Cons

• Caps on Returns: Maximum participation rate can be less than 100%.
• Volatile Index: No interest credited if index decreases.
• No Stock Dividends: Growth excludes stock dividends since no direct stock investment.
• Management Fees: Can reduce cash value.
• Potential Tax Issues: Loans and withdrawals could have tax implications if policy lapses.

Example

• If an index gains 6% in a month, that gain is applied to the cash value.
• Participation rate and current cash value determine the interest added.
• Policies may calculate index gains monthly or annually.

Investment Considerations

• Not primarily a retirement savings vehicle.
• Best for high-net-worth individuals seeking to reduce taxable income.
• 401(k) often recommended over IUL for most people due to lower fees and no cap on earnings.

Conclusion

• Provides both life insurance coverage and an opportunity for cash value growth.
• Better suited for individuals seeking permanent insurance with cash accumulation potential through equity indexes.
• Weigh pros and cons carefully, considering high costs and investment limitations.