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Indexed Universal Life Insurance has been around since 1997 but has seen a surge in popularity over the last decade. Years prior, Whole Life had been the primary life insurance vehicle for accumulating some cash value while still paying out a guaranteed death benefit. However, during the 1970’s a lot of policyholders decided they could do better by buying less expensive Term Life (for pure death protection) and investing the difference (for income and savings). The Life Insurance Industry responded by developing Universal Life. A very flexible product, fixed Universal Life uses part of premiums to fund pure Term coverage, then pays a sliding % of cash to the savings part of the policy.
With the rise of the stock market in the dot-com era, people wanted the chance to accrue more cash value in their UL policies by investing in the funds of their choice. Variable Universal Life was developed for this purpose. It offered a combination of death benefit and potential for high returns; however, it also had the same risk of going backwards that the stock market presents.
Following the crash of 2002, Indexed Universal Life saw a growth of 360%. That is because Indexed Universal Life allows policyholders to take advantage of the upside of the stock market while protecting them from downside of the stock market.
The subsequent crash of 2008 and near continual volatility in the stock market since the turn of the century have forged a place for IUL products into the financial industry for what appears to be many years to come. As one researcher put it, “And with (Equity Indexed Universal Life), the most important thing in volatile markets was that this …return could be achieved by clients without losing some sleep.”
Indexed Universal Life Insurance is first of all, life insurance. Upon the death of the insured person, the policy pays a lump sum of cash to the beneficiary. This is what sets life insurance apart from simply investing in the stock market, putting money into CD’s, or contributing to one’s 401K at work. There is no doubt that many people can save large sums of money, but it takes time. By contrast, a life insurance policy could pay what it can take a lifetime to save, within ONE DAY of taking out the policy, upon death of the insured.
IUL policies offer death protection plus savings, or cash value. The amount of money going to death protection is based on the age and health of the person, and the face amount of the policy. The younger and healthier the person being insured, the less the COI (Cost of Insurance). However, someone buying an Indexed Universal Life policy can choose to put much more into the policy than the COI, because the remainder is invested into funds, and is what creates the cash value. In fact, many people “over-fund” their IUL policies a lot so that they can accumulate tax deferred dollars that can be tapped into when needed.
Most often, IUL’s are use to provide income during retirement. Tax free loans are taken from the cash value of the policy, which is up to the insured whether they want to pay back. As long as they do not allow the cash value to drop too far (yearly statements are important to keep on top of UL policies), they will not only have an income source to keep up the lifestyle they desire, but if death would occur, their beneficiary will have a lump sum to invest and continue providing income. The death benefit may be reduced by the loans taken out prior to death, and in some situations, taxes may be charged…you should have a good life insurance agent and tax adviser to make sure everything works as it is designed to do.
Professionals such as doctors and attorneys often find Indexed Universal Life especially suited to their needs. While generally making a high amount of income, retirement investment choices might be restricted due to their particular tax codes and contribution limits. IUL has no limit on the amount you can contribute. When cash is needed, it can be accessed through tax free loans, or passed on to heirs in the normally tax free wrapper of life insurance.
Besides tax deferred growth, there are situations where making premium contributions to an Indexed Universal Life Insurance policy could result in a favorable tax event for businesses. IUL can also work great in a Buy-Sell Agreement. Typically, partners buy Term life insurance on each other, so they have the money to buy out the other partner’s share if that partner should die. Using IUL, if they both live to retirement age, the money put into premiums is not lost. They can have set themselves up a nice retirement account! Or can use the policy funds to purchase stock. The security of not having to worry about the fund ever losing money makes this a policy most partners can agree to.