Life Insurance

What Is Indexed Universal Life Insurance?

An indexed universal life insurance policy includes a death benefit for your beneficiaries along with cash value that grows over time.

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An indexed universal life policy may offer flexible premiums and permanent coverage for the rest of your life. An IUL could be beneficial for those who are in the process of retirement planning or someone who wants to leave a family legacy behind.

What Is Indexed Universal Life Insurance? 

Indexed Universal Life Insurance (IUL) is a type of universal life, which is a permanent life insurance that financially protects your family and loved ones when you pass.

Whether your goal is to leave a legacy behind or you’re in the process of retirement planning, the IUL is customizable to your goals and needs. An indexed universal life policy includes a death benefit for your beneficiaries along with cash value that grows over time. 

How Does Indexed Universal Life Insurance Work? 

Indexed universal life insurance, also known as cash value life insurance, provides a death benefit and cash value. The death benefit is chosen upon applying for the policy. However, you may increase or decrease your death benefit at any time while your policy is active. A death benefit is a tax-free payment that your listed beneficiaries could receive from your life insurance after you pass. This money may go towards your funeral expenses and your family’s living expenses. 

Similar to whole life and variable life insurance policies, an indexed universal life policy may offer flexible premiums and permanent coverage for the rest of your life, though premiums may be more expensive compared to a whole life policy because of how the policy accumulates cash value.

The cash value in an IUL grows alongside an index that’s chosen by the insurer, such as the S&P 500 or NASDAQ. The cash value may be used as an investment vehicle because it performs based on how the insurer’s selected index does.

Some insurers may provide a guaranteed rate of return each year on the growth of your cash value. Depending on how much cash value you’ve accumulated, you may withdraw or take out a loan from your cash value at any time. 

Key Features of Indexed Universal Life Insurance 

Key features of an indexed universal life policy include: 

Flexible Death Benefits and Premiums 

You may choose to increase or decrease your death benefit and premiums at any time. For example, if your budget has increased due to a new job, you may choose to increase your death benefit. In doing so, your premiums may increase along with it. Or, if you are let go from your job and your budget decreases, you may choose to decrease your death premiums in order to fit the policy into your budget. 

Access To Cash Value 

Cash value could be a resource to supplement retirement income or be an emergency fund for you in the future. While your policy remains active, you may have access to the cash value in your policy. You could choose to pay premiums, withdraw, or borrow against your cash value. It’s important to keep in mind that the cash value is meant for you, the insured, to use while you’re living and anything that’s left over will go to the insurer. 

In the case that an appliance in your home broke down or you needed car maintenance, you may choose to withdraw from your cash value. When withdrawing from your cash value, bear in mind that it may lower the death benefit of your policy. 

Tax Benefits

Tax benefits of an indexed universal life policy include: 

  • Accumulation of your cash value grows tax-deferred: You may not have to pay on the gains of your cash value. 
  • Tax-free cash value withdrawal and loans: When taking out cash, a loan or withdrawal may be tax-free. Bear in mind that depending on your policy, the cash may be tax-free to a certain amount. If you withdraw or borrow against this amount, you may be subject to income tax.
  • Tax-free death benefit: Your listed beneficiaries may receive tax-free money from your IUL insurance policy after you pass away. 

Advantages of Indexed Universal Life Insurance

With indexed universal life insurance, there are advantages that may be beneficial for you such as a lifelong death benefit and the unlimited contributions that you could put towards your policy. 

Lifelong Death Benefit

Indexed universal life insurance is a type of permanent life insurance. Unlike a term life policy where your life insurance may expire, your IUL policy lasts for the rest of your life so long as you continue to pay premiums. This ensures that your beneficiaries will receive a death benefit that may protect them from any financial burden after you pass away.

Price 

In an IUL, the premiums for your policy are customizable based on your budget, and you may increase or decrease your premiums at any time. There is the choice to pay a minimum premium for your indexed universal life insurance as well. Bear in mind that minimum premiums may vary from person to person due to age, gender, and health.

Unlimited Contributions 

There is no limitation to how much you could fund your IUL. By paying your premiums, you’re funding your IUL and there’s not a “maximum” contribution to it. The more you fund your IUL, the faster your cash value may accumulate.

Disadvantages of Indexed Universal Life Insurance 

There are disadvantages of an indexed universal life you could consider to see if the IUL is the most suitable for you. 

Fees 

There may be management fees associated with the policy in order to help your cash value grow. The cost of management fees may cost more than you anticipated over the years. For example, if you fund your policy at the minimum amount, it may take a longer time to see the accumulation of your cash value. Yet, you may be paying management fees every month to see little cash value growth. 

Touch on what types of fees are associated with IULs and the different ways this can impact the insured.

Cap on Returns 

Regardless of how well the index performs, there is a cap on the return of your cash value. Depending on your risk tolerance, you may consider investing in the market directly.

Increasing Premiums

Unlike whole life where premiums are level, in the IUL, premiums may increase year after year. There are factors that affect premiums in an IUL insurance such as mortality, management fees, and premium expense charges. 

Tied To Equity Index 

The cash value of an IUL is tied to indexes such as the S&P 500 and NASDAQ composite. How the cash value grows is based on the performance of that selected index. The benefit of growing with an index fund is when the index declines, your cash value is not affected and does not decline. 

The IUL may be beneficial for those who may not be risky with the stock market and do not want to see a decline in their investments. 

Who Should Consider Indexed Universal Life Insurance? 

Indexed universal life insurance may be good for those who are saving up for retirement, wanting to take a loan out to start a business, or planning to leave a legacy behind for their children. Since the cash value grows tax-deferred, this could be beneficial for those who are saving up for something long-term, such as saving up tuition to go to college. 

Bear in mind that you may not see growth in your cash value for two-to-5 years after the start of your life insurance policy. 

It’s also important to note that the IUL may not be a fit for everyone. For example, if you want something for only funeral expenses, then a whole life policy would be more suitable for you. Or, if you want more gains on your investments, investing in stocks, bonds, or a variable life insurance policy may be a better option.