Build wealth with indexed universal life.
Indexed universal life (IUL) is permanent life insurance that pairs a death benefit with a cash value account linked in part to a market index. Because every policy works a little differently, this page explains how IUL works, who it may suit and what to weigh before you decide.
A death benefit and a cash value account.
Indexed universal life insurance is a type of permanent life insurance. As long as the policy stays in force, it pays a death benefit to your beneficiaries. It also builds cash value, which is an account inside the policy that you can borrow against or withdraw from during your lifetime.
What sets IUL apart is how the insurer credits that cash value. Instead of earning a fixed rate, the policy credits interest that depends in part on how a market index, such as the S&P 500 price index, performs over a set period. However, you do not invest your money in the index or in the stock market. Instead, the insurance company credits interest using a formula, which usually includes a cap, a participation rate or both, and a floor.
Because of that formula, IUL offers the potential for growth in good market years and protection from index losses in down years. Nevertheless, the policy does not guarantee growth, and policy charges apply every year. As a result, careful policy design matters.
How it works, step by step.
Premiums go in
Because the policy sets limits, you pay premiums within a flexible range. Part of each premium covers the cost of insurance and policy charges, while the rest goes into the cash value account.
Interest gets credited
At the end of each crediting period, the insurer credits interest based on the index’s performance, but the cap or participation rate limits the amount. Meanwhile, if the index falls, the floor, commonly 0%, means the policy credits no index-based loss.
You access cash value
When cash value has built up, you may draw on it through policy loans and withdrawals for retirement income, business needs or other goals. However, loans and withdrawals reduce the cash value and the death benefit.
Your family is protected
When the insured passes away while the policy is in force, the insurer pays the death benefit to the beneficiaries. In general, they receive it free of federal income tax.
The language of IUL, in plain English.
Cap rate
The cap rate is the maximum interest the policy can credit for a period. Therefore, even a very strong index year cannot push the credit above the cap.
Participation rate
The participation rate is the percentage of the index’s gain that the insurer uses to calculate your credited interest. For example, a 50% rate on a 10% index gain produces 5% before any cap applies.
Floor
The floor is the minimum interest the policy credits for a period, commonly 0%. However, a floor protects against index losses, not against policy charges.
Cost of insurance
The cost of insurance is the monthly charge for the death benefit. Because it generally increases as the insured ages, it matters more in the later policy years.
Surrender charge
A surrender charge is a fee that may apply if you surrender the policy or withdraw large amounts early. For this reason, IUL works best as a long-term commitment.
Modified endowment contract (MEC)
A modified endowment contract is a policy that you fund above federal limits. As a result, loans and withdrawals receive different tax treatment.
Who it’s for, and who it may not suit.
Often a good fit
- Lifelong coverage appeals to you, so you are comfortable funding a policy over many years.
- Building supplemental, accessible cash value alongside your other savings appeals to you.
- As a business owner or high earner, you have already addressed basic protection and retirement accounts.
- Growth potential linked to an index appeals to you, while protection from index losses matters too.
- Legacy or estate planning is part of your goals, so permanent coverage fits.
May not be the best fit
- Coverage for only a specific number of years is your goal, so term life is often the more economical choice.
- Long-term funding feels out of reach, because IUL works best with steady premiums.
- Returns similar to investing directly in the market are what you expect, but caps and charges limit IUL growth.
- Access to most of the money in the first few years may be necessary, since surrender charges can apply.
- A replacement for an employer retirement plan is what you want, but IUL is life insurance, not a retirement plan.
What carriers look at for IUL.
Because IUL is medically underwritten, carriers also consider whether the policy fits your financial situation.
Age and health
Carriers review your age, health history, build, tobacco use and sometimes prescription and lab information. Premiums and approval then depend on the results.
Ability to fund the policy
Because IUL works best with long-term funding, carriers and your agent consider whether you can sustain the premium you plan to pay.
Purpose and suitability
Your agent reviews your income, existing coverage, goals and time horizon. As a result, you can confirm that the policy fits what you need.
Carrier and state rules
Minimum premiums, issue ages, riders and available products differ by carrier and by state. Therefore, your agent checks the options for your state first.
IUL questions, answered.
Is indexed universal life an investment in the stock market?
No, because the cash value is not an investment in an index or in the stock market. Instead, the insurance company credits interest using a formula that depends in part on how an index performs.
Can I lose money in an IUL policy?
The floor protects against index-based losses in a crediting period. However, it does not protect against policy charges, loans or withdrawals. As a result, cash value can decrease, and a policy with too little funding or too much borrowing can lapse.
Is the growth guaranteed?
No, because interest depends on index performance and on the policy’s cap, participation rate and charges. The contract guarantees only its stated minimum values. In addition, those guarantees depend on the claims-paying ability of the issuing company.
How is IUL different from whole life?
Whole life generally has fixed, level premiums and cash value that grows at a rate the contract sets. In contrast, IUL generally offers flexible premiums and cash value growth that links in part to an index, without a guaranteed rate beyond the contract minimum.
How is IUL different from term life?
Term life covers you for a set number of years and has no cash value. In contrast, IUL is permanent coverage that includes a cash value account. Therefore, it typically costs more than term for the same death benefit.
Can I take money out of an IUL policy?
Many policies allow loans and withdrawals once cash value has built up. However, they reduce your death benefit and cash value. Also, a lapse or surrender with outstanding loans can create taxable income, so ask a tax professional about your situation.
Does IUL replace a retirement account?
No, because IUL is life insurance rather than a registered investment or retirement plan. Instead, it can serve as one part of a broader plan, so discuss it with a qualified financial or tax professional.
Indexed universal life insurance is not an investment in the stock market or in any index, and it is not a security. The policy does not guarantee cash value growth, and caps, participation rates, fees and policy charges limit that growth. Loans and withdrawals reduce the death benefit and cash value, and they may cause the policy to lapse or create a tax liability. Illustrations do not guarantee future performance. Opulent Life Financial does not provide tax or legal advice, so please consult a qualified professional.
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