The Good, The Bad, The Bottom Line…
Indexed Universal Life (IUL) Insurance has gained a lot of popularity over the years because of agents selling them as an investment and a way to earn retirement income tax free. According to LIMRA, an insurance marketing and research company, new IUL premiums increased by over 25% in the fourth quarter of 2021 and this trend will continue to grow.
What is an IUL?
An IUL is a permanent life insurance policy that provides a death benefit but also builds cash value. The cash value is tied to an index like the S&P 500 for example and can grow tax-free without the risk of a market downturn. They are complex products and not for everyone so it’s important that you speak to an honest licensed insurance agent to make sure that it’s structured properly.
Our Top 4 carriers for IUL policies right now are Prudential, Lincoln Financial Group, Mutual of Omaha and American General. They appear to be very competitive when running their illustrations. Here are the benefits of an IUL.
1. IULs provide a Death Benefit
IUL insurance can provide a death benefit for your loved ones and this death benefit can be passed on to your beneficiaries tax-free.
2. IULs can offer a higher overall return
The potential gains from the cash value can be much higher than any other financial products and you also get the benefit of a floor thus you are protected from a market downturn.
3. IULs offer Tax Advantages
The cash value accumulates tax-deferred and the death benefit is tax-free. Loans made against the policy are also tax-free in many cases. This is why many people are considering IULs as a way to supplement their retirement income.
Here are some downsides to the IUL
1. Your gains are limited
Your cash value is limited by the insurance carrier. Thus, if the market has an incredible bull run then you don’t participate in those higher returns since your returns are limited to the cap. However, if the market has a bear run than you also don’t participate in the extreme losses because of the floor.
2. An illustration can look more attractive than the actual performance
As with any product tied to index funds, an IUL isn’t bulletproof. Sometimes when illustrating an IUL it can look very appealing however an illustration is not a guarantee and it’s designed around the historical average typically but can in fact be far lower than what you may anticipate. Like most financial products, it’s important to manage your expectations and understand that there is a risk to these types of policies.
3. Fees and Costs
Similar to mortgage financing, IUL fees are typically front loaded. Fees can be very high that’s why it’s very important to structure these policies as a long term play because the longer you carry the policy the more advantageous it becomes. Costs are different from one insurer to the next and it also depends on your age and health.
The Bottom Line!
An IUL gives you a life insurance policy with a death benefit that has cash value with no direct investment in the market. You are protected from a bear market and get most of the benefit from a bull run.
An IUL premium can be very expensive and they come with many fees. They are very complex and require a deep understanding on your part but it really is all about how it’s structured thus why it’s ever so important to discuss your IUL options with a licensed insurance agent who is genuinely there to help you understand exactly what you are purchasing.