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Indexed Universal Life (IUL) insurance
Indexed Universal Life (IUL) insurance
Indexed Universal Life (IUL) insurance is a type of permanent life insurance that combines death benefit protection with a cash value component that can earn interest based on the performance of a selected stock market index, such as the S&P 500. It offers policyholders the potential for higher returns compared to traditional universal life insurance, while still providing a level of protection against market downturns.
Benefits of IUL:
- Lifetime Coverage (up to 120 years)
- Potential for Higher Returns
- Protection Against Market Downturns
- Tax-free growth and Tax-free distribution (IRS 7702/7702a)
- Living Benefits (Chronic, Critical and Terminal Illness)
- Access to cash value
- Protected Asset
- Tax-free Legacy Transfer
Indexed Universal Life insurance offers a blend of death benefit protection and the potential for cash value growth tied to market performance, with built-in downside protection. Its flexibility and tax advantages make it an attractive option for those seeking a permanent life insurance solution with growth potential. However, the complexity and associated costs require careful consideration and a thorough understanding of the product. Consulting with a financial advisor can help determine if an IUL policy aligns with your financial goals and needs.
Frequently Asked Questions
Simply put, it is the interest your policy earns based on positive changes in an external market index (such as the S&P 500® Index). You can choose one or more indexed allocations, which are a combination of an index and its associated method of determining how interest is credited.
The insurance company tracks the performance of your index allocation(s). If the return is positive, you earn indexed interest based on that indexed allocation’s crediting method. If the return is negative, you don’t receive indexed interest – but you don’t lose value, either. Because you’re not actually participating in the market or buying shares in any index, your principal is never reduced due to market downturns (although certain fees and expenses will reduce policy values). Over time, indexed interest can increase the “cash value” of your policy – the amount of money you can access via policy loans and withdrawals.
You can access any available cash value in your policy via a loan that is income-tax-free. The amount of your loan can be credited with annual interest that can potentially offset the cost of the loan. You can also take withdrawals (partial surrenders) which will reduce your policy values, including the death benefit, and may be subject to taxes if it exceeds the total premiums paid. Or you can request a full surrender at any time; however, a surrender charge will apply if requested in the first 10-15 years of the policy.
Remember that when accessing policy loans and withdrawals, you should consider that the available cash value and death benefit will be reduced accordingly and that the loans may be taxable if the policy lapses or is surrendered. You should consider the potential tax implications of taking policy loans and withdrawals and discuss them with your tax professional.
An IUL policy can be a valuable tool for retirement planning, especially for those looking for a combination of life insurance protection and the potential for cash value growth. The ability to grow cash value based on market growth with principal and growth protection during market corrections, tax-deferred, while providing a death benefit, makes it an attractive option for some individuals. However, it’s important to consider factors like investment goals, risk tolerance, and the costs associated with IUL policies. Contact us to determine if an IUL policy fits into your overall retirement strategy.