Universal Index Life Insurance (IUL) is getting a lot of interest among those looking for a little investment action with their life insurance protection these days. The IUL, also known as universal stock-indexed life insurance, is a kind of hybrid vehicle.
Like any whole life insurance product, it guarantees a payout upon death. And like other types of universal life insurance, IUL maintains a cash value that increases over time as premiums are paid.
Why choose Indexed Universal Life Insurance (IUL)?
The difference with the IUL is that the policyholder can link up to 100% of the policy’s cash value to a stock market index such as the S&P 500 or the Nasdaq 100. The remainder, if any, goes into a fixed account. If the indexed account shows earnings (generally calculated over one month), a percentage of the interest income, called the “participation fee”, is added to the cash value of the policy. If the index drops in value or remains stable, the policyholder’s account yields little or nothing.
Although similar in performance to a bond, IULs are not considered investment securities. The cash value is not [actually] invested in the market or an index. The index is just a measuring device to determine the rate of interest credit on the cash value account.
As with any type of universal life insurance, it is crucial to carefully research all companies being considered to verify that they are one of the best universal life insurance companies currently in operation.
The Earnings Upside
The most significant advantage of IUL insurance is the potential for cash value gains – gains that can be significantly greater than those possible in many other types of financial products, including traditional universal life or whole life insurance policies.
Policyholders also get the benefit of a credit floor, typically 0% or 1%, so that existing cash value is protected against loss in an underperforming market. If the index generates a negative return, the customer does not participate in a negative credit rate. In other words, the account will not lose its original cash value.
Tax Advantages
The cash value accrues tax-deferred, and the death benefit is tax-free for beneficiaries. Loans taken out against the policy are also tax free in many cases. Prizes are paid in after-tax dollars, so partial and full withdrawals (up to the amount of prizes paid) are also tax-free.
There are also a variety of clauses that are available to make the policy more attractive (and valuable), including guaranteed premiums, living benefits, provisions for long-term care and critical illness, and of course, guaranteed death benefits. Follow in the next article…
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