What is IUL?
Indexed Universal Life (IUL) insurance is a type of permanent life insurance offering both a death benefit and a cash value component. The cash value earns interest based on a tracked stock market index like the S&P 500 or Nasdaq-100, providing growth potential without direct stock market investment.
Key Features:
- Flexible Premiums and Death Benefit: Policyholders can adjust premiums and, in some cases, the death benefit.
- Interest Rate Guarantees: IUL provides a minimum interest rate (floor) while capping maximum gains, typically between 8%-12%.
- Investment Options: The policy allows for the allocation of cash value to both equity-indexed and fixed-rate accounts.
How It Works:
- Premium Allocation: A portion of the paid premium covers insurance costs and fees, while the remainder goes to the cash value.
- Interest Credits: The cash value grows based on index performance, with rates affected by the insurer’s participation rate. Gains are credited to the cash value monthly or annually.
- Loan Options: Policyholders can borrow against the cash value, with unpaid loans reducing the death benefit.
Pros:
- Permanent Coverage: Offers lifelong insurance protection as long as premiums are paid.
- Potential Growth: Cash value can grow tax-deferred, providing investment flexibility.
- Death Benefit: Permanent and not subject to probate or income taxes.
Cons:
- Caps on Returns: Maximum participation rates may restrict accumulation.
- Volatility: Growth is tied to potentially volatile equity indexes.
- Fees: Management fees can erode cash value.
- Premium Monitor: If premium payments are skipped or underpaid, additional funds may be required to avoid policy lapse.
Comparison to Other Investments:
- Versus 401(k): IUL isnโt generally better than a 401(k) for retirement savings due to high fees and capped earnings.
- Versus Whole Life Insurance: IUL offers more investment potential and flexibility, while whole life insurance provides fixed premiums and easier understanding.
What can we learn?
IUL policies are best for those wanting permanent life insurance with growth potential linked to market indexes. They are particularly useful for high-net-worth individuals looking to reduce taxable income. For most retirement savings, traditional vehicles like 401(k)s are preferable.
