Is an Indexed Universal Life (IUL) insurance policy right for you? IULs have exploded since the late 1990’s thanks to Transamerica which first started offering these products in 1997. Now, most major life insurance carriers offer IULs, Term and/or Whole Life Insurance. With the wide popularity of indexed exchange traded funds or ETFs, many people have also sought out IULs to provide both a death benefit and cash value accumulation based on some of the most liquid indexed funds.
So, what is an Indexed Universal Life policy? It is a universal life insurance policy that offers flexible premium payments, meaning you can pay more or less than the proposed premium to pay into your policy. Like all life insurance policies, an IUL is first and foremost designed to provide a death benefit to whichever beneficiaries have a vested interest in your well-being. Paying premiums in excess of your policy’s costs creates the accumulation of cash that sits in an account. This account provides interest credits based on the returns of an index but also is calculated based on several additional factors. Most IULs have annual caps on interest credits. For example, you may choose a segment based on the S&P 500 index with a floor of 0%, 10% cap, and a 65% account index multiplier. If the S&P returned 15% in a year, you would be capped at 10% plus an additional 65% times the 10% cap bringing your total interest credit to 16.5%. If the S&P returned -10% the same year, you would have an interest of 0% due to the 0% floor.
One of the major cons of an IUL vs a Whole Life Insurance policy is that the cost of insurance can vary year to year. Whole life insurance has fixed annual costs based on the initial year the policy was created. On the other hand, Whole Life is known to be generally more costly although your cash value accumulation is more stable. With an IUL, you can potentially create more cash value due to the potential for higher returns on one or multiple indexes versus the interest rates provided on a whole life insurance policy. The most commonly overlooked aspect of an IUL is the variable cost of insurance. There are plenty of insurance brokers that will fail to mention the cost of insurance and wrongfully advertise an IUL as a safe investment with nothing to lose due to the 0% floor preventing downside on the invested indexes. In the years where an index is flat or negative, you may not lose cash value from the index but instead from your continued life insurance costs.
Never forget that you are continuously paying a cost for your insurance which is not fixed for IULs. IULs can be costly, especially if you are not paying enough into your IUL to build a cash value. If you do decide on having an IUL as part of your financial planning, make sure to stay ahead of your premiums. Another thing to note is that if you put too much money into an IUL, your policy may be taxable as a Modified Endowment Contract or MEC, even when you are taking out a loan against your cash value. This is more common than you may realize as these life insurance products are often mislabeled as investments. It is important to think of an IUL as a life insurance policy first and foremost. The cash value accumulation can be an attractive afterthought if the indexes are performing. If the indexes are not performing, you may potentially have no cash value and, instead, left with a costly death benefit potentially 3-5 times higher in premium than comparable term life insurance.
At Solid Health Insurance Services, we are always happy to review your life insurance options. For many, having varying types of life insurance may make the most sense while for others, sticking to basic term life may offer an affordable peace of mind. If you have dependents and assets you are concerned about in case of the unexpected, let us help you review your options from a variety of carriers we are proud to work with including Prudential, John Hancock, Protective Life, Lincoln Financial, AXA Equitable, Mutual of Omaha, TransAmerica & more.
For a quote, please contact us at 310-909-6135 or at email@example.com and we will be more than happy to review your existing coverage and find what needs are not being met. As an independent insurance brokerage, we will help you find the right carrier that meets both your needs and your budget.