Indexed Universal Life Insurance: 12 Undeniable Advantages

A Tax-Free Strategy to Build Wealth Without Stock Market Risk

What is Indexed Universal Life Insurance?

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Indexed Universal Life Insurance (IUL) is a permanent life insurance policy that provides a death benefit and is also an excellent savings vehicle for accumulating cash.

The cash accumulates on a tax-deferred basis and it can be accessed at any time and for any purpose in a tax-free manner.

Why use Indexed Universal Life insurance as a savings vehicle?

An IUL does not have the same restrictions and rules that govern qualified plans such as 401(k)s, Roth’s and SEP’s. See the numbers behind an IUL compared to a 401(k).

The cash that accumulates inside a policy can be used for any purpose such as college funding, supplemental retirement income, and charitable giving.

You can access this money at any age without penalties and taxes.

Unlike a 401(k) or IRA, there is no limit to how much can be saved into an IUL.

If you are maxing out your qualified plan or just saving enough to get the company match, then an IUL is a perfect vehicle to save additional money for the future.

There is also no stock market risk to challenge the growth inside an IUL. Can you imagine the difference in your finances when there are no 40% market drops to make up?

How does Indexed Universal Life Insurance work?

Interest is credited to an IUL based on an external index such as the S&P, Nasdaq, or Dow Jones.

Each insurance company offers a selection of several indices to choose from (U.S. and Global) and you can change your index selections every year. This will vary by policy.

If the index is positive for the year, then your policy will be credited with the interest; sometimes up to a cap.

In the index is negative, your policy is protected with a guaranteed minimum interest rate (typically 0 to 2%) for the year.

This is how you can participate in the upside of the market with no downside risk.

The insurance company is able to offer this potential without the risk by using hedges and options. We can walk you through this strategy and explain exactly how they do it if you are interested.

What are the negatives of Indexed Universal Life Insurance (IUL)?

There is no perfect financial product, but an IUL offers a combination of advantages that are simply not available in any single financial vehicle.

Most of the “negatives” can be overcome by just paying attention to your cash value in the policy and speaking with a knowledgeable insurance advisor or the insurance company when making decisions regarding your policy.

An IUL is a life insurance policy so you must qualify – healthwise and financially – to be approved for your policy.

If you have health issues, you can use another person (spouse, child, business partner, etc) to be the insured, as long as, there is an insurable interest. As the owner, you would still control money going in and out of the policy.

If the policy lapses or is surrendered, the income you took out of the policy may become taxable.

Options to circumvent this issue include, flexibility in paying the premiums and reducing the death benefit. Most insurance companies also offer a rider to help protect the owner from withdrawing too much tax-free income from the policy.

The expenses may be higher than other vehicles in the initial years of the policy.

However, over the life of the policy, the expenses in the IUL can be much lower than other savings vehicles like a 401(k) or IRA and your IUL does include life insurance.

What are the benefits of an IUL?

It would take a combination of several other vehicles to equal the benefits and features found in indexed universal life insurance. Here is a list of the major benefits:

  • Life Insurance: A death benefit (usually tax-free) will be paid to your beneficiary if the unthinkable happens.
  • Protection from market risk: An IUL is not an investment in the stock market. If the market crashes, your gains are locked in from the previous year and your principal is safe with no losses.
  • Upside Potential: You have the potential to earn double digit gains inside your IUL. As of 2014, most indices in IUL policies have averaged 6-10% over the last 25 years with no losses to make up.
  • Tax-Deferred Growth: Your cash grows tax-deferred inside the policy.
  • Tax-Free Distributions: When you take money out of the policy, it comes out tax-free enabling you to create a tax-free income for yourself or taking chunks of money out tax-free, as needed.
  • High Contributions: Unlike a 401(k), IRA or other qualified plan – you can save as much inside an IUL as you qualify for.
  • Liquidity, Use and Control: You do not have to wait until age 59.5 to use your money without penalties and taxes like in a qualified plan.
  • Guaranteed Loan Options: As long as you have the cash inside your policy – you can borrow from it at any time without penalty. There is no credit check, no application, and it does not matter if you are employed.
  • Unstructured Loan Payments: You can borrow money from your policy through a loan and you decide the terms to pay the money back or if you pay it back.
  • Uninterrupted Compound Interest Accumulation: With some loans, you continue to earn interest on the amount that you borrow from the policy.
  • Creditor Protection: In some states, the money inside a life insurance contract is protected from creditors.
  • Additional Benefits: These will vary by company, but may include: Long Term Care Riders, access to the death benefit early if you are terminally ill or waiver of premium payments if disabled, to name a few.

Where does Indexed Universal Life Insurance fit in your financial plan?

Indexed Universal Life Insurance e-Book

Download our new e-Book on Indexed Universal Life Insurance for Free

Most people think of life insurance for the death benefit only and do not know that there is a type of life insurance that can provide incredible living benefits and tax advantages. If you are looking for a savings vehicle that can help build wealth with no taxes and no market risk, then an IUL may be the right vehicle for you.

To see an illustration of an indexed universal life insurance policy, call or email us with the specifics of your situation, including:

  • Amount of life insurance required
  • How much you want to save in the policy on a monthly or annual basis or annual tax-free income you would like in the future
  • Duration of funding and when income is needed
  • Date of birth
  • State
  • Smoker (yes or no)
  • Health (If you have any health conditions, please discuss with us so we can advise which company will be best for your situation)

We will then email an illustration to you and will review and answer questions over the phone and/or with a screen-share of our computer.

At Abrams Insurance Solutions, we educate our clients on how to grow their money with no additional risk and no negative impact on their lifestyle.