Advantages of index life insurance or Pros of Indexed Universal Life Insurance
Indexed universal life insurance (IUL) is getting a lot of interest among those looking for a little investment action with their life insurance protection these days. IUL, also known as equity-indexed universal life insurance, is something of a hybrid vehicle. Check Pros of Indexed Universal Life Insurance
Like any whole life insurance product, it guarantees a payout upon death. And, like other types of universal life insurance, IUL holds cash value that goes up over time, as premiums are paid.
Why Choose Indexed Universal Life Insurance (IUL)?
The difference with IUL is that the policyholder can tie up to 100% of the policy’s cash value to a stock market index, such as the S&P 500 or Nasdaq 100. The remaining portion, if any, goes to a fixed account. If the indexed account shows gains (calculated usually over the course of a month), a percentage of the interest income, called the “participation rate,” is added to the cash value of the policy. If the index falls in value or remains steady, the insured’s account nets little or nothing.
Although it performs similar to a security, IULs are not considered investment securities. “The cash value is not [actually] invested in the market or an index. The index is just a measuring device to determine the interest crediting rate on the cash value account,” explains Jordan Niefeld, CPA, CFP, of Raymond James & Associates in Aventura, Fla.
As with any kind of universal life insurance, it’s crucial to carefully research every firm that’s being considered to verify that they’re one of the best universal life insurance companies currently operating.
The Upside Growth
The most significant advantage of IUL insurance is the potential for gains in the cash value – gains that can be significantly higher than those possible on many other types of financial products, including traditional universal life or whole life insurance policies.
Policyholders also get the benefit of a crediting floor, typically 0% or 1%, so the existing cash value is protected from losses in a poorly performing market. “If the index generates a negative return, the client does not participate in a negative crediting rate,” says Niefeld. In other words, the account will not lose its original cash value.
Tax Advantages
The cash value accumulates tax-deferred, and the death benefit is tax-free for beneficiaries. Loans made against the policy are also tax-free in many cases. Premiums are paid with after-tax dollars, so partial and full withdrawals (up to the amount of premiums paid) are tax-free, too.
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