Indexed Universal Life
What is Indexed Universal Life Insurance?
An IUL, or Indexed Universal Life insurance policy, is a type of permanent life insurance that combines a death benefit with a savings component and a flexible premium structure. Here's a breakdown of how it works:
Key features
1. Death benefit: Like traditional life insurance, an IUL provides a death benefit to your beneficiaries if you pass away.
2. Cash value component: The policy also accumulates a cash value over time, which you can borrow against or withdraw.
3. Indexed crediting: The cash value grows based on the performance of a specific stock market index (e.g., S&P 500), but it's not directly invested in the market. This means you can benefit from market growth without directly participating in the market.
4. Flexible premium structure: You can adjust your premium payments, skip payments, or even stop paying premiums for a while, as long as the policy's cash value is sufficient to cover the costs.
5. Tax-deferred growth: The cash value grows tax-deferred, meaning you won't pay taxes on the gains until you withdraw them.
How the indexing works
The insurance company will typically offer a selection of indexes to choose from (e.g., S&P 500, NASDAQ, DJIA). The cash value will then be credited with a percentage of the index's performance, usually with a cap (e.g., 10%) and a floor (e.g., 0%). This means:
* If the index goes up, the cash value will increase by the capped percentage.
* If the index goes down, the cash value will not decrease, but the growth will be limited to the floor (e.g., 0%).
Pros and cons
Pros
* Potential for tax-deferred growth
* Flexibility in premium payments
* Death benefit protection
* Opportunity to benefit from market growth without direct market risk
Cons
* Complexity: IULs can be difficult to understand and manage.
* Fees and charges: There may be fees for administration, mortality, and other expenses.
* Caps and floors: The indexing mechanism can limit the upside potential.
* Risk of lapse: If the cash value is depleted, the policy may lapse.
Who might benefit from an IUL
* Individuals seeking permanent life insurance with a cash value component
* Those looking for a flexible premium structure
* People who want to benefit from market growth without direct market risk
* Business owners or executives seeking supplemental retirement income