Indexed Universal Life vs. Whole Life:
What is the Difference?
Indexed Universal Life Insurance: What is an IUL?
An IUL stands for “indexed universal life” insurance policy.
Like all life insurance, IUL’s produce a death benefit. But, an Index Universal Life policy is a type of universal life insurance that gives more than just a death benefit. One type is a fixed rate, which is subject to inflation. Another type is a variable rate, which is invested in the stock market, so it has too much risk. With an Indexed Universal Life, your principal is guaranteed, while your interest rate is based on the market. You get the best of both worlds. Because of this, the IUL can earn a reasonable rate of return, and help retirees earn retirement income, tax-free. In addition, beneficiaries get their inheritance without having to go through probate.
Many people use an IUL as part of their financial plan in retirement. With an IUL, the insurance company holds your money. Therefore, your cash value has protection. In fact, with this product, your money is not actually in the market. Instead, you can choose to have your rate of return linked to an index. In this way, IUL owners can earn a reasonable rate of return when their index is up. Yet, when the index is down, they don’t lose their cash value. No matter what happens in the market, an IUL provides protection for the money you put into it.
How Does an IUL Work?
Basically, when you fund an IUL, a portion of your premium funds for life insurance coverage. The rest (minus costs), is your cash value. This cash value may earn an interest rate, linked to an index. The index is not invested directly in the market. So if your IUL’s index were to go up, then your account may be credited with a reasonable rate of return. But, if the market drops, your cash value does not. This is because your principal cash value is never invested directly in the market.
Also, some policies allow you to pick multiple indexes, instead of just one. So, it is possible to actually “diversify” within your IUL. For example, you may pick to have a share of your available cash value earning a fixed rate of interest. Another part of your money may be earning interest from a different index. And, the third chunk of your money could be linking to a different index. Because the possibilities are endless, it is essential to learn about all the options available to you.
Living Benefits of
Indexed Universal Life Insurance
In addition to simply providing a death benefit, IUL’s can assist retirees in multiple ways. First, an Indexed Universal Life plan can provide extra flexibility in contrast to some other financial channels. Because, an IUL is an insurance product, the retirement and tax laws surrounding it are different from accounts that deal in securities, like 401(k) or IRA accounts. For instance, IUL’s have no contribution limits, no income limits, and no income restrictions. Additionally, unlike some retirement accounts, IUL’s have no required minimum distributions (RMD’s) or fines for withdrawing money before the age 59 1/2.
Another upside to an IUL: it’s pretty protected. Your cash value stays the same, even if there are losses in the market. Plus, your money accumulates based on a stock market index, rather than the market itself. So, you may see some gain when the index is up, but you don’t lose when the index is dropping. More importantly, you secure your earnings, keeping them from risk. For many retirees, this protection gives them peace of mind. Mainly because no one ever really knows what may arise in the stock market.
IUL’s have additional benefits, too. For example, you can finance your policy with one lump sum of money. Or, you can finance it over time. Additionally, because your cash value is fluid you can access it for income, without paying income tax. Also, your cash value can grow tax-free. What may be very important to you is that your death benefit is accessible while you are alive, tax-free to cover long-term care costs. There are many possibilities, so be sure to speak with us about which ones may be right for you.