Discover the Risks Of
Index Universal Life
Book a Free Consultation with our
Financial Strategist Today!
We work with Companies you can Trust
Many agents fail to communicate the complexities of IULs, focusing solely on the potential cash value growth while overlooking important factors like policy costs, caps, and risks.
What is Index Universal Life (IUL)?
Indexed universal life insurance is a form of annual renewable term life insurance that offers both a death benefit and a cash value component. The cash value accumulates based on a stock market index, such as the S&P 500. However, it usually comes with a cap on maximum growth (which may vary according to the contract) and a floor to guard against losses. Ultimately, the growth of this policy isn’t determined solely by the indicies; it’s also impacted by cap rates, participation rates, and spread charges, all of which can influence the overall performance and returns of the policy.
How Index Universal Life Insurance works?
Adjustable premiums and death benefit
As with universal life, IUL premiums are adjustable. If you ever decide to skip a premium payment or underpay, the cost of insurance and policy expenses are deducted from your cash value. You may also be able to adjust the death benefit amount if your needs change. However, you may be asked to complete a life insurance medical exam if you apply to increase your coverage.
Cash value accumulation
The cash value is allocated to one or more sub-accounts that track the performance of stock or bond indices, such as the S&P 500. You can select which accounts to invest in based on the options provided by the insurer. Interest is credited to your account based on the index's performance, meaning your cash value can grow when the index rises. However, if the index declines, your account may earn significantly less or even nothing, exposing you to potential losses in cash value growth.
Tax Advantages
IULs offer potential tax advantages, allowing policyholders to access cash values through withdrawals or loans in a tax-favored manner. However, it’s important to be aware that excessive withdrawals or loans could lead to unintended tax consequences or even policy lapse if not carefully managed.
Living benefits and riders
IUL policies may offer living benefits and optional riders, allowing policyholders to access funds for critical illness, chronic illness, or terminal illness. These additional features enhance the policy's versatility and can provide financial support during unexpected circumstances.
Things to Consider:
Market Participation and Cap Rates:
Understand the policy's participation rate in market indices and any imposed cap rates on returns. While IUL provides market-linked growth, knowing the limitations or caps can help set realistic expectations regarding potential returns.
Flexibility and Premium Adjustments:
Evaluate the flexibility the policy offers in adjusting premiums and death benefits. Ensure that the policy aligns with your changing financial needs, allowing you to adapt to circumstances such as income fluctuations or changes in life goals.
Policy Charges and Expenses
Charges and expenses are associated with these types of policies, such as cost of insurance, administrative fees, and rider charges. Understanding these costs is crucial for assessing the overall performance and efficiency of the IUL policy.
