There are a lot of life insurance products out there and it can be confusing to figure out which one is the right for you. Here at InsureChance, we work with over 60 different companies and have experience in sorting through a hundred of plans to find what’s best for our client. Figuring out a plan all depends on what’s right for you and you may have been approached about Index Universal Life which left you wondering if this is the best plan for you. Index Universal Life Insurance is a fairly newer product compared to Whole Life or traditional Universal Life. In this article, we will cover what Indexed Universal Life is, its pros and cons, IUL vs other permanent plans and much more. Here is a quick summary:
- Indexed Universal Life is a type of Universal Life Coverage that invests the cash value based on the market index.
- Indexed Universal Life can provide lifetime protection until age 100 or 121 while also building up your investment account.
- This policy protects you from losing money by having a floor which means your cash value won’t go below 0%.
- If you’re looking for a simple permanent life insurance to protect your family a Guaranteed Universal Life Plan is more ideal.
- It may not be the best investment and you should really consider just getting a term and investing rest into an Index Fund.
- The returns you see on an Index Universal Life illustration are just examples and actual returns will vary.
- There are many options in the marketplace and you should shop around with an independent life insurance broker to get the best rate.
What is Indexed Universal Life?
This is a permanent type of life insurance policy which is a type of universal life insurance policy. Since it is a universal life plan it offers you flexibility when it comes to your premiums and death benefit. That was the actual benefit universal life insurance offered in comparison to a whole life plan. The coverage is a lifetime plan that will typically cover you until age 100 or 121. There is also a savings component with a universal life policy which most people know as cash value. Cash value is built from a portion of your premiums going to a savings account where your funds get invested. The type of investment vehicle you get is what makes IUL policy different from other UL’s. The IUL cash value account is based on indexing which is usually derived from S&P 500 and few others. Your investment in this policy will also grow tax deferred which can be used for emergencies or to supplement your retirement portfolio. Many individuals prefer IUL’s to other cash value permanent plans since you are getting returns from indexing and not from volatile stocks. In addition to that, IUL plans come with what’s known as a floor which means that you can’t lose money if the market crashes. (the guaranteed rate is usually 0% to 2% depending on plan) In a nutshell, this is a good plan for people that want life insurance with additional financial return without a huge downside.
The type of investment vehicle you get is what makes IUL policy different from other UL’s. The IUL cash value account is based on indexing which is usually derived from S&P 500 and few others. Your investment in this policy will also grow tax deferred which can be used for emergencies or to supplement your retirement portfolio. Many individuals prefer IUL’s to other cash value permanent plans since you are getting returns from indexing and not from volatile stocks. In addition to that, IUL plans come with what’s known as a floor which means that you can’t lose money if the market crashes. (the guaranteed rate is usually 0% to 2% depending on plan) In a nutshell, this is a good plan for people that want life insurance with additional financial return without a huge downside.
What are some Pros and Cons of Indexed Universal Life?
Well, like all thing in life IUL policy has some pros and cons so let’s look at what they are.
The Pros
- You get to have a permanent life insurance policy so at one point or another your family would get a pay out.
- You can choose how and when your premiums get invested and often time can make changes to your policy amount/premiums.
- The policy can provide additional money for any of life needs or simply to enhance your portfolio.
- Investment returns are tax deferred, unlike traditional investments that get taxed with capital gains.
- It is also more affordable than some other permanent life insurance plans like whole life.
- Because the returns are indexed and not invested in stocks you have less chance of losing money.
The Cons
- The returns may take some time to start compounding since there are a lot of policy and administration fees.
- If looking for pure protection coverage there are better alternatives.
- There is a cap on the potential upside of index performance.
- Not sure if this is a con but this policy is not that simple to understand and can be confusing to a lot of people.
Indexed Universal Life vs. Guaranteed Universal Life
A guaranteed universal life insurance policy is a fixed rate plan that provides lifetime coverage and offers a no lapse guarantee. Which means that if you pay your premiums the policy will not lapse even if the market is not performing optimally. A typical universal life plan premiums can change if the cash value is not generating enough money from the cash value account.
Anyways, let’s get back to the topic at hand which is about IUL VS GUL. The debate is quite simple, if you are looking for a permanent life insurance coverage that is most affordable and provides a pure death benefit then a GUL policy is your ideal choice. It is by far the most affordable and simple to understand life insurance policy that we recommend to most of our clients. You can have a policy with no bells and whistles that can be locked in until the ripe age of 121.
For those that have maximized their 401k or Roth IRA and are looking for an additional investment with tax benefits, an IUL will be a better option. You should also be somewhat a savvy investor if you go with an IUL policy since there are a lot of small details that you need to pay attention to with this policy. The risk of investment is quite moderate with this policy due to indexing so is not a bad choice as an investment vehicle. However, you’ll want to ensure that you fund the policy accordingly since small premiums are not going to get you anywhere.
Indexed Universal Life as an Investment
I know you may be working with an agent or advisor who is promising you that this policy will take you to the top. It is possible but highly unlikely because we need to keep in mind that it is an insurance product first and an investment second. What does this mean exactly? It means due to the fact that it is a life insurance policy most of your premiums are going to pay for the annual renewable term and lot of policy fees which include agent commissions and administration fees. This is the exact reason why your policy cash value really won’t compound any of your funds for a good 5 year period. This reason alone makes it not such great investment in our opinion because compounding is everything when it comes to growing your money.
In addition to that, your agent will show you an illustration demonstrating a return of 6% or in some odd cases even 8% returns. But the key here is to know that these are illustrations and not an actual return which can vary. If that was the case, ask them to show you their IUL policy because anyone would be foolish not to get those returns with tax benefits of life insurance. If you’re a serious investor who is looking to build a portfolio within a tax sheltered life insurance policy than you should really check out Variable Universal Life. It is definitely a policy for the advanced investor but you can directly invest into the stock market.
*Here’s a little tip: You should get a term life or GUL policy and invest the rest into an Index Fund with Vanguard or other brokers. Even Warren Buffett recommends Index Funds, don’t believe look it up.
Let Us Help!
By now you have a pretty clear understanding of what an Indexed Life Insurance Policy is all about. So what’s the next step? Well, it is to work with the right agency to find you a plan and get you the best rate and who is better at this than a company that works with over 60 top rated insurers. Here at InsureChance, we allow our visitors to compare the entire marketplace in a few clicks of a mouse and will take you from A to Z in the life insurance shopping process.
