Our Complete Guide To Index Universal Life Insurance [IUL Insurance]
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Index Universal Life Insurance, also known as IUL Insurance or simply IUL.
You may be thinking to yourself, aren’t these just fancy names for universal life insurance?
And to your credit, we don’t blame you.
There are some slight differences between the two that are very important for the sake of your future and wallet.
Here’s our guide on indexed universal life insurance (IUL).
Indexed Universal Life Insurance (IUL) explained
It may sound contradictory, but Index Universal Life Insurance (IUL) is a form of permanent life insurance, behaving similarly to universal life insurance.
Indexed Universal Life Insurance (IUL) differs from traditional universal life insurance as a result of your ability to accumulate cash value based on the growth generated by a group of stock indexes, instead of a static interest rate.
The way Index Universal Life Insurance (IUL) and traditional universal life insurance differ is due to how the cash value operates.
Both policies allow for adjustable/flexible premiums, as well as the ability to continue to generate additional funds towards your maximum.
Index Universal Life Insurance (IUL) specifically lends its cash value to a specific stock index allowing for explosive growth potentially.
It’s important to note that Insurers may lower the maximum amount you are allowed to earn as the policy holder. This may occur due to societal conditions, applicant status, what have you.
You may also be required to requalify every 3-5 years, again depending on the conditions of the market.
How Does Index Universal Life Insurance (IUL) Work?
Once you find yourself eligible for Index Universal Life Insurance (IUL) coverage, your insurance provider will then allow you to select your portfolio, policy details, as well as your desired death benefit.
An Indexed Universal Life Insurance (IUL) policy comes with a minimum interest rate in which you can expect to see returns over time.
In some cases, your interest rate may even exceed the rate given to you initially, depending on the conditions of the market as well as the specific index profile.
Additionally, you may be presented with multiple portfolios when applying for coverage.
Index Universal Life Insurance (IUL) allows you to accumulate an additional cash value associated with your policy via an equity index account (NASDAQ, S&P, etc.).
An equity index account is essentially an investment profile utilized by most capitalistic societies.
Within this investment profile, you usually “buy in” the form of a stock, to which the compan(ies) in that IUL Insurance profile then use that cash to invest back in the companies among that index.
The interest rate generated may change depending on the economic conditions, the companies’ methods, what have you, although there will always be a minimum interest rate you can expect to see returned to you – this is usually outlined when applying for Indexed Universal Life Insurance (IUL).
For lack of a better definition, you’re investing in the company and in turn, the company uses your investment to produce more profit for you and the company.
How Does Index Universal Life Insurance Generate Interest?
Insurers will provide low cost loans to individuals using the premiums generated from Index Universal Life Insurance holders.
This process is called Arbitrage and is utilized by most investment profiles in America.
Arbitrage by definition is the simultaneous purchase and sale of the same asset in order to profit using the marginal differences in said assets’ high and low.
All of this is done for you, guaranteeing you see a minimum return on your investment as outlined by the contract given to you within the application process.
For example:
If your IUL Insurance gained 6% during the first month your policy is active, then that 6% is then multiplied by the cash value initially agreed upon during qualification. This value is then added to your IUL Insurance profile concurrently until you reach the maximum amount allotted to your policy.
Is Index Universal Life Insurance A Good Investment?
Index Universal Life Insurance serves a great hybrid option for those who wish to combine the investing process with life insurance.
Although this is enticing, you are getting the jack-of-all-trades, master-of-none approach. As a result, both parts of the policy may not be the best in their respective field – but you do get both at the same time.
If you’re looking for a dedicated investment profile, or if you’re too young to logically apply for coverage, another portfolio such as a 401k may be a better choice.
Index Universal Life Insurance (IUL Insurance) vs Another Investment Profile
It’s important to note that Indexed Universal Life Insurance is potentially the most expensive coverage option, factoring in your coverage on top of the investment profile associated with your IUL Insurance. There are pros and cons, though, depending on the specifications you look for. For example, Index Universal Life Insurance is a whole life policy, meaning your coverage will last your entire lifetime so long as premiums are made.
Index Universal Life Insurance vs Term Insurance
Term Life Insurance is simple and competitively priced. You apply for a period of time in which you wish to be covered for, usually called a term. The major downside to Term Life Insurance is that it is not permanent, and must be reapplied for at the end of your term. The upsides to this policy, though, involve the very high maximum coverage amounts and low monthly premiums. This policy is almost always going to give you the most bang for your buck, but without the luxury of an investment profile.
Index Universal Life Insurance vs Traditional Whole Life Insurance
Again, this is a lot simpler to navigate then an Indexed Universal Life Insurance policy, as you just pay your monthly premiums and you’re all set for the remainder of your lifetime. The lack of flexibility with this policy is simultaneously a pro and a con, as it’s less to worry about, but at the cost of your IUL Insurance investment profile.
Why Should I Get Index Universal Life Insurance (IUL)?
The main factor that makes these policies enticing involves the combination of an IUL Insurance investment profile as well as the security of having a whole life insurance policy.
Also, if you already own investment profiles (such as a 401k, Roth IRA, etc.) then you can double down on your potential investment.
When Not To Get Index Universal Life Insurance
There’s a few key factors that may discourage you from acquiring an Indexed Universal Life Insurance policy.
– When the fees outweigh the usefulness of the policy
– You don’t simultaneously need coverage and an investment profile.
– If you ever don’t make premiums, your policy will be voided as usual, but you also lose the value associated with your IUL Insurance investment profile.
– You are not willing to make a long term investment. To effectively grow your cash value, it’s important to not withdraw your coverage as this minimizes the effective gains you may have received.
What Happens If IUL Insurance Market Conditions Trend Negatively?
As this is a Whole Life Policy, You’re still guaranteed the initial interest rate you applied for as well as the inevitable payout so long as premiums are maintained.
You are also able to withdraw the funds or adjust the percentage of investment at any time.
As this is a universal life insurance policy, the flexibility is there.
Index Universal Life Insurance and IUL Insurance Regulations
As part of the Consumer Protection Act, Indexed Universal Life Insurance policies are exempt from the federal regulations that oversee the investment market, as they exist in a middle ground between life insurance and portfolio.
As a result, the NAIC has struggled to produce consistent guidelines for Indexed Universal Life Insurance (IUL).
As a result, there aren’t many to this day.
It’s important to note that the Insurance agents that qualify you for a policy and assist in selecting your desired market do not undergo the same training as say an investment broker would.
As this is a universal life insurance policy, the flexibility is there.
IUL Insurance Pros and Cons
Pros
- The ability to accrue interest towards your payout.
No other policy behaves this way, simultaneously allowing you to prepare for final expenses as well as participating in an active exchange that potentially produces a profit (on top of your minimum that you’re guaranteed).
- As this is a form of universal life insurance, Indexed Universal Life Insurance provides policy holders with flexibility.
As with universal life insurance, they enable policy holders to move at their own pace, even allowing them to withdraw portions or all of the death benefit at will. As this is an Indexed Universal Life Insurance policy, you are entitled to the normal benefits of a universal life insurance policy on top of the IUL Insurance investment profile. These policies also usually are accompanied by a plethora of riders as well as an investment coach meant to guide you through the market.
- Despite having an investment profile associated with your coverage, Indexed Universal Life Insurance is non taxable and does not interfere with other supplemental assistance.
The unique way in which Indexed Universal Life Insurance operates allows it to avoid capital taxation on the sale of an asset unless users forfeit the policy before it’s matured. This is due in part to the way in which you receive a payout, in the form of a life insurance payout, which is technically not an asset once paid out.
Cons
- Possible fluctuations in the market may affect your growth or cause a mandatory renewal period.
Although you are guaranteed a minimum return on investment, the market conditions may discourage the growth of your portfolio. Although this isn’t ideal, at least you’re in a safer position as there is a guaranteed minimum you can expect to see.
- Caps on growth.
On that note, you are going to see a minimum return, but there’s also a cap as to the maximum amount of growth you can achieve. In this case, you’d be better off participating in your own portfolio.
- May have to re qualify every 3-5 years.
Depending on marketing conditions, as well as the conditions associated with the insurance provider, you may have to reinstate your policy every 3-5 years. This is especially the case if your growth is towards the high or low end of the bell curve.
Our Top Picks For Indexed Universal Life Insurance Providers (IUL)
Our top pick for indexed universal life insurance, providing users with ultimate flexibility. These policies are sometimes referred to as Max Accumulator+. They are available to those between the ages of 18 and 80, at a minimum of $50,000. The beauty of this policy is that it is permanent coverage and does not require a medical exam, which is very uncommon with most Indexed Universal Life Insurance (IUL).
2.
Coming in at #2, Mutual of Omaha is a competitive option for those looking for coverage other than indexed universal life and is one we recommend frequently. Mutual of Omaha’s indexed universal life insurance policy begins as a term policy but may be renewed or converted to permanent coverage before age 90.
2.
Our #3 spot for Indexed universal life insurance, Americo offers a competitive permanent policy requiring no medical exam but rather a questionnaire meant to assess your broad risk factors. Not much is detailed on their website, minus the lack of a medical exam.
How To Buy Indexed Universal Life Insurance
Final Thoughts
Indexed Universal Life Insurance is a great option because it combines life insurance and an investment profile, giving you a middle ground option for both.
Effectively killing two birds with one stone.
Overall, if you don’t need life insurance then this policy is not for you.
Without the need for coverage, the appeal of this policy/profile drastically declines.
Frequently Asked Questions
What Is IUL Insurance?
this is another word for Indexed Universal Life Insurance, sometimes referred to as IUL.
Can You Lose Money with Indexed Universal Life Insurance (IUL)?
in 99% of Indexed Universal Life Insurance policies you are guaranteed a minimum return on your investment.
Can You Withdraw From Indexed Universal Life Insurance (IUL)?
Since Index Universal Life Insurance is universal life insurance it’s very flexible and allows you to make adjustments at any time.
What is Better: a 401k or Index Universal Life Insurance (IUL)?
It depends on your personal needs, as an index universal life insurance serves a dual purpose, whereas a 401k is only for investment purposes.
Is Index Universal Life Insurance Really Tax-Free?
Yes, as it technically serves as an insurance policy, the inevitable payout is tax-free.