An IUL is a life insurance policy that offers the death benefit protection of traditional life insurance, however, its' main objective is the increase of cash value within the policy. The cash value accumulation is based on the performance of one or more underlying indexes. The main benefit of these options is the ability to generate significant profits within the policy cash value without the risk of loss when one or more indexes decrease in value. IUL's provide policy holders with the potential to have their life insurance premiums returned to them in the form of tax-free cash value, while also having the death benefit protection in place for their loved ones. For a more detailed account of how this works, you may wish to read IRS Sec. 7702 of the U.S. tax code.
IULs have become increasingly popular in recent years as more and more people look for ways to grow their money without taking on unnecessary risks.
In describing the drawbacks to IULs, many non-agents as cite high fees and Surrender Charges that traditional stock investments typically do not have. However, upon closer examination, these fees are typically "front-loaded" in the first 10 years of the policy life as are the surrender charges. If one were to compare this type of policy over a typical stock investment with commissions and management fees you will find little difference in the long run. Then, if you then compare the tax-free distributions vs. taxability on gains as well as increasing tax on social security payments you will be pleasantly surprised.
IUL's are one type of permanent life insurance policy, which means they offer lifelong coverage as long as the premiums are paid.
Universal life insurance policies are another type of permanent life insurance that also offers lifelong coverage, however, they do not have the same cash value growth potential as IUL's. Whole life insurance is another type of permanent life insurance, however, it does not offer the same cash value growth potential as IUL's or universal life policies.
With an IUL, you have the potential to participate in the upside of the market while having downside protection.
This means that if the market goes up, your cash value will grow; but if the market goes down, your cash value will not go down as much, and may even continue to grow. You may also take advantage of the annual interest paid on the policy by the insurance company instead of a choice of indexes. This of course would only make sense if you felt that your change of gain in a particular year might be greater in "cash" than in the market.
IULs typically offer several different index options to choose from, each with its own set of rules and requirements. You can often select how frequently you want your cash value to be linked to the index performance, and you may have the option to take loans or withdrawals from your policy.
There is another important but little understood way the "borrowing" of tax-free" distributions benefits the policy owner.
When one borrows from the policy, the insurance company uses the policy cash value as collateral for the loan. This means that gains (or interest) are based on the entire cash value in the policy. Said another way, you pay interest on the loan but earn interest on the entire cash value which in some cases can result in positive leverage.
One of the benefits of IULs is that they offer the potential for tax-free growth on the cash value inside the policy.
The cash value grows tax-deferred, which means you don't have to pay taxes on it until you withdraw the money. And if you structure the policy correctly, you can withdrawal the money tax-free. This is because IULs are considered life insurance policies by the IRS, and as such they are subject to IRS rules regarding life insurance policies.
IULs also offer the potential for a death benefit that is greater than the cash value in the policy.
This can be accomplished through what is called "indexing to a multiple", which essentially allows you to leverage your death
IULs can be a flexible and powerful tool for financial planning, and can offer significant benefits over other types of investment products. If you are looking for potential upside with downside protection, an IUL may be right for you. Give us a call at 425-214-4757.
He has been exclusively involved in the life insurance and related areas for the last 30 years. During that time, he has seen many changes in the business, and uses his diverse knowledge and experience to help potential clients understand how life insurance can play a significant part in their financial planning, especially their retirement planning.
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