Indexed Universal Life Insurance Policy
WHAT IS IUL?
Indexed universal life, or IUL, is a type of life insurance policy that provides both a death benefit and a cash value component. The funds that are within the policy’s cash value differ from those in a whole life insurance policy, or even from a regular universal life insurance policy because the return with an IUL policy is tracked based on the performance of an underlying market index. One of the more popular index options is the S&P 500. (The policyholder may also be able to choose more than one index to track, depending on the insurance carrier and the policy).
When the underlying index performs well in a given year, then the cash value is credited with a positive return – usually up to a “cap” that is set by the insurance company. If, however, the underlying index performs poorly in a given year, the policyholder will not lose value in the account, but will just be credited with a 0% for that period. There is also an option to place the policy’s cash value funds into a fixed account.
WHAT IS IUL, AND HOW DOES IT WORK?
The way interest is credited to an IUL policy provides the potential for a higher return than that of a whole life insurance policy or even regular universal life. For example, in years where the underlying index performs positively, your account will be credited with that return, up to a particular “cap.”
So, for example, if your policy has a cap of 7%, and the underlying index has a return of 8% in a given year, your cash value would be credited with 7%.
However, in years where the underlying index performs negatively, your cash value account will simply be credited with a 0% return, therefore protecting principal – and allowing you to continue building up your cash value, without having to make up for any losses.
The funds that are inside of your cash value account are also allowed to grow on a tax-deferred basis. This means that there are no taxes due unless or until the money is withdrawn. This provides your cash value account with the ability to grow and compound over time.
Because IUL is a permanent form of life insurance, you have the benefit of knowing that your loved ones are protected financially with the income-tax-free death benefit. Unlike term life insurance, IUL policies do not expire after a certain period. So, as long as you continue to pay the premium, this coverage will remain in force – even if an adverse health condition deems you as uninsurable in the future.
Just like with other permanent life insurance
products, indexed universal life insurance comes with a savings component (also called an investment component). It also has a cash benefit that can be tapped should any needs come up.
Where it differs from other permanent life insurance options is its interest-earning potential. It offers some potential for savings growth while keeping your money intact when the market falls.You can see how this growth potential with market protection is one of the primary differences between IUL and the 401(k). Contrastingly, 401(k) savings are completely at the mercy of the market when it tumbles.
Indexed Universal Life for lifetime protection and growth potential
Indexed universal life insurance is a specific type of universal life insurance that offers lifetime protection and flexible features. It’s primary characteristic is that it allows for the possibility of market-linked cash value growth based on the performance of one or more market indices, subject to caps and floors.
Is Indexed Universal Life the right policy for you?
Indexed universal life insurance is for people who need lifetime protection, flexible features and potential cash value accumulation to help meet their financial needs for the future.
IUL could be the right policy for you if you want:
- Potential for lifetime death benefit coverage
Cash value accumulation potential based on the performance of at least one market index (excluding dividends and subject to caps and floors)
Flexible death benefits and premium payments
How does Indexed Universal Life work?
Indexed Universal Life (IUL) is a permanent life insurance policy in which your premium payments can earn interest and help grow the cash value in your policy. Similar to universal life insurance, the differentiator with IUL is the way cash value growth occurs.
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