Choosing Great Insurance

Posted on: 19 September 2022

Indexed universal life insurance, or IUL policies, can help you build up your wealth profile while also leaving behind death benefits for your beneficiaries. The policy will place a part of your premium payment in a renewable term life insurance policy. The remainder is added to the cash value of your policy, minus any fees. Over time, the value of the cash is credited with the interest made on these increases in what is called an equity index. Before you jump into an IUL, you should understand both the benefits and the drawbacks. Here is what you need to know:

What Are the Benefits of an IUL Policy?

One of the first benefits of an IUL is the increased potential of a return. You can get higher equity indexes without worrying too much about losses. This is different than a whole life insurance policy in that they only provide a smaller interest rate that is not always guaranteed. IUL returns can fluctuate and are highly dependent on how well the index underlying the policy is performing. However, you are typically guaranteed a certain minimum on the investment.

There is also more flexibility in an IUL policy. You can decide how much risk you want in your investment portfolio. You can adjust the death benefits when you need to do so. You can also choose from different riders to help customize your policy.

Another benefit is the lack of capital gains on your increased cash value. The only stipulation is if you abandon the policy prior to maturity. Other forms of investments may include capital gains taxes if you withdraw from them.

There is also no impact on your social security. Social security is generally an important part of a retirement plan. Any cash accumulated from an IUL policy does not count towards the earnings mandated by the SSA. You could take a loan against your IUL policy to help supplement your social security income without issue.

What Are the Drawbacks of IUL Policies?

One drawback is the caps on the returns. When the equity markets are performing well, you may find your IUL is capped after a certain point. You could notice a limit on your rate of return toward your policy, even if the index is doing well.

Another issue is the lack of a guaranteed interest rate. IUL policies only offer returns based on the index, which comes with variable returns. You will have to be comfortable with risks to make this type of policy work for you.

There are also fees associated with IULs. This includes administrative expenses, commissions, riders, and premium expense charges.

Talk to an insurance agent to learn more about indexed universal life insurance.