Life Insurance
What is an IUL?
Life Insurance: What is an IUL?
An indexed universal life (or IUL) insurance policy is an insurance company that comes with a number of benefits.
Yes, being life insurance, they provide a death benefit. However, they can be useful to retirees who purchase them in a number of other ways. Firstly, policyholders may earn a rate of return on their max-funded IUL. This is because an IUL gains interest based on the performance of an index (hence the term, “indexed” universal life.) Secondly, an IUL may be a great way to protect your money. And, lastly, because they are insurance products, IULs may come with certain tax benefits that traditional savings accounts don’t have.
In exchange for your premium, an insurance company provides you with a life insurance policy. An IUL policy is typically “max-funded,” meaning the total life insurance premium is paid upfront. The policy is linked to an index, but the money is not invested in the stock market. This provides a level of safety that many other financial vehicles cannot, making an IUL highly beneficial.
Basically, when you pay your full premium to fund an IUL, some of that money goes to paying for life insurance coverage. After that coverage, and including fees, the rest of the money is your cash value. You may earn an interest rate on this money, based on an index or indexes. However, it’s an important distinction that the money is not invested in the stock market. Now, let’s explore some of the benefits of IULs.
Living Benefits
While leaving money for your loved ones is the primary function of life insurance, an IUL policy comes with more benefits that can help you while you’re still alive.
As we mentioned previously, tax laws function differently for IULs. Additionally, they don’t come with the same contribution limits as traditional retirement plans like IRAs or 401(K)s. Furthermore, an IUL doesn’t come with a required minimum distribution (or RMD), or a penalty for withdrawing money early. You can take the money out whenever you need it. Or, you can choose to not withdraw it at all.
And, as we talked about before, IULs offer a lot of safety as a place to keep your money. Your value remains constant, even in the event of a stock market downturn.
Another key benefit? You can fund your policy all at once. If you have already maxed out your retirement accounts, but still want to save additional money, an IUL may be a great help to you.
Legacy Benefits
There’s no way to predict how taxes will be in the future. Additionally, we don’t know how those future changes will impact your money. However, there are ways to prepare. An IUL may provide you with peace of mind, because there is no tax on your beneficiaries, and probate court isn’t required. This, in addition to how the death benefit is much larger than the amount you initially put into the policy. In regards to the tax rules on these products, you may want to consult a tax advisor for more information.