Indexed Universal Life Insurance (IUL) is a type of permanent life insurance that is more flexible and stable for the policyholders. With the IUL insurance policy, you can decide what type of premiums you wish to avail and how much cash value a policyholder wishes to assign to their equity indexed account. To give you better insights on IUL insurance, we have written this comprehensive guide to explain what is Indexed Universal Life Insurance and what are its pros & cons.

What is Indexed Universal Life Insurance (IUL)?

The Indexed Universal Life Insurance (IUL) offers a death benefit along with a cash value component. Its up to the insurers to finalize which cash value account is linked with the stock market index according to the policy.

The cash valued funds usually have a valuable interest rate, but at the same time, they are categorized on the basis of interest rate guarantees. Some of the Indexed Universal Life Insurance (IUL) insurers offer a fixed rate account, which gives you the option to manage the policys performance.

How is Indexed Universal Life Insurance (IUL) Different?

The IUL insurance policies can be more volatile as compared to the fixed universal policies but carry a lower risk than the variable universal life insurance policies. The Indexed Universal Life Insurance (IUL) policies do not invest in equity positions.

Other than IUL death benefits, this insurance policy is not considered a preferred retirement savings plan since it carries high fees as compared to other options like 401(k). Usually, the IUL policies are preferable for individuals who have high net worth but wish to reduce their taxable income.

How Does the Indexed Universal Life Insurance (IUL) Work?

The IUL insurance policy comes with adjustable premiums like any other universal life insurance policy. However, it provides better flexibility by letting the policyholders skip or pay less premiums in some scenarios. The decisions on deciding premiums are based on how you wish to invest the cash value.

When the insurance policyholder makes any premium payment, a portion of that amount is considered to pay for the costs of life insurance. Once the fees are paid, the remaining amount is included in the insurance policys cash value. The added cash value is then further in the equity index. Ultimately, the policyholder earns interest with an assured range.

Key Features of IUL Insurance

• Life-long coverage for permanent term if the premiums are kept up to date.
• Flexible Premiums and death benefits.
• You can partially allocate the cash value to a fixed-interest option.
• Guaranteed interest rate with a cap on gains that ranges from 8 to 12 percent.
• You can use the cash value to cover the premiums without affecting the death benefit.
• Some IUL policies may let the policy holders select more than one indexes

What is the Minimum Return on the IUL Policy?

The minimum return percentage is definite, which is usually around 8% to 12%. Such a return percentage rate makes Indexed Universal Life Insurance a more attractive option as compared to complete life insurance policies. In comparison to IUL, the complete life insurance policies give a lower return on investment.

Indexed Universal Life Insurance (IUL) also allows you to add long-term recovery care, nursing home costs, or any accelerated death benefit. Moreover, the IUL policyholders benefit from tax-free gains unless the policy is abandoned by the holders before it becomes mature. This is yet another advantage of availing IUL as compared to other options which might tax you upon withdrawal of capital gains.

What are the IUL Pros and Cons?

Pros

• Offers higher returns as compared to other life insurance.
• IUL policies can be transformed according to the policyholders preferred risk level.
• Offers tax-free capital gains.
• The IUL policies do not decrease the Social Security Benefits.
• The cash value of the policy can be used to reduce or cover the premiums without decreasing the death benefits.
• Some of the policies may offer cash value designations in various indexes.
• You dont have to pay capital gains when the cash value increases unless you leave the policy before it becomes mature.
• Insurance policies with IUL may allow you emergency access to the cash values, but for a fee, of course.

Cons

• Return rates are a round-off, which are typically between 8% to 12%.
• Returns have variable premiums with the passage of time and may vary according to the index.
• You may have to pay higher premiums and commission fees as compared to other insurance policies.
• Return rates may not perform very well in the stock market during the growth period.

IUL vs Whole Life Insurance: Which One is Better for You?

Deciding whether to choose Indexed Universal Life Insurance (IUL) or the whole life insurance plan depends upon your long-term goals. Whole life insurance is a better choice for those who are looking for guaranteed benefits with a defined premium that gives stable return rates. Hence, whole life insurance is a safer option for those who want to provide for their family after their death.

On the other hand, the Indexed Universal Life Insurance (IUL) policy is best for those who are looking for flexible options to manage their policy. Hence, you get to amount of death benefit and the freedom to allocate your cash value amounts. The IUL policyholders can also skip or pay less premiums when the cash amounts are sufficient. However, it doesnt make the IUL the cheapest option.

Conclusion

The Indexed Universal Life Insurance (IUL) policy offers some advantages to the policyholders as an overall retirement and investment strategy. You get the freedom to create flexible premiums and get the option to decrease or increase the benefits upon death. IUL policies dont require you to make any annual contributions either, but that doesnt mean that they are more affordable than whole-life insurance policies. Hopefully, this article has given you a brief idea of what is Indexed Universal Life Insurance (IUL) and how it works.