Indexed Universal Life Insurance

Indexed Universal Life Insurance Pros and Cons

The indexed universal life insurance policy is like a Swiss Army Knife for your finances but is certainly not always justified.

People with disposable income purchase indexed life insurance as an asset to provide tax-efficient wealth accumulation or safeguard against untimely death.

Most people who use life insurance for retirement income are under 50 years old because policies can take almost fifteen years to reach their peak efficiency.

People of all ages and incomes can buy indexed universal life coverage for pure lifetime death benefit protection.

Many affluent families buy a policy covering both husband and wife called survivorship indexed universal life insurance (SIUL).

The primary reasons for buying SIUL are to either protect their fortunes from eventual estate taxes or a wealth transfer strategy.

Let’s take a closer look and review a list of pros and cons of buying indexed universal life insurance.

Advantages of Indexed Universal Life Insurance

Several advantages of lifetime protection products, like guaranteed universal life, are also possible with many quality IUL insurance policies. 

• Flexible Death Benefits and Premiums: You can change your premiums and lower the face amount, depending on your cash-value performance and needs.
• No-Lapse Guarantee Rider: A no-lapse rider prevents your policy’s death benefit from lapsing until age 120, regardless of the performance of your cash value.
• Long-term Care: Optional living benefit riders can be added to your policy and help protect your family from liquidating other assets.
• Accelerated Death Benefit; Many policies also provide an accelerated death benefit if you become terminally ill.

Plus, where indexed universal life insurance truly shines is how the cash value accumulation of works compared to other types of permanent life insurance.

• Higher Return Potential: IUL policies leverage call options to gain upside exposure to equity indexes without the danger of losses. 
• Minimum Return: IULs can offer a guaranteed minimum return on your policy’s cash-value account.
• Unlimited Contributions: Traditional retirement accounts like 401(K) and IRAs have contribution limits, but IULs do not have such limitations.
• Tax-free growth and distributions:  Distributions are tax-free when you eventually withdraw money from the cash value of the IUL.
• Easy Access: There is no age requirement for withdrawals, unlike 401(K) and IRAs, where you have to wait until age 59 before taking withdrawals.
• Loans: Depending on your policy and available cash value, you can borrow money against your life insurance policy without facing penalties and income taxes.
• Social Security: Policy withdrawals will not count toward the social security earnings thresholds, and neither will any loan values that you borrow.
• Safety: Cash values are relatively secure compared to other investments, which is helpful when using life insurance for retirement income.

Depending on how your agent builds your policy, it is not uncommon for both protection and savings goals to be satisfied within the same IUL policy.

Cons of Indexed Universal Life Insurance

There are often suitability problems when unscrupulous agents sell this product to people who really cannot benefit from it due to their age and underlying needs.

Thankfully, many carriers now require a suitability questionnaire to be filled out and signed before activating a new policy.

• Needs: If you do not need permanent life insurance when you retire, you should avoid buying any lifetime coverage.
• Long-Term Investment: Buying term insurance and investing the money you save from not buying universal life is wiser for people with a short investment time frame.
• Age Limitations: The accumulation timeline constraints of IUL make it an inappropriate strategy for older investors. 

Other problems exist within the policy language, which is meant to boost the insurer’s profits while producing inferior cash value performance for its policyholders.

• Caps on participation rates: Some insurers establish a maximum participation rate of less than 100%, limiting the rate of return credited toward your account each year.
• No Guarantees: IUL policies offer returns based on an underlying index and have variable rates over time.
• Fees: IUL insurance policies can come with various costs that detract from your policy’s rate of return.
• Lapse: The policy could potentially lapse (unless it has a no-lapse rider) if the premiums are not timely, causing the money you take out to become taxable. 

Both company and product selection are essential because many quality insurance companies have taken proactive steps to mitigate these risks.