You may have heard of universal life insurance in the past. But indexed universal life insurance may be a term that you’re not so familiar with. Although the two are similar, there are some key differences that you want to understand before you choose to go with one over the other. Here is everything you need to know about indexed universal life insurance (IUL). Life Ant can provide quotes on IUL policies in a matter of minutes if you are interested in buying a policy or knowing how much it will cost you to own one.
What Is Universal Life Insurance?
Universal life insurance is a type of permanent life insurance policy where some of the premium amount paid is placed into an account within the policy. This will earn interest for you and build value over time that you can use to borrow from later on.
The interest is determined by market interest rates, and by law it can not be less than 2%. A contract could potentially have a higher minimum interest rate, but usually it will not. When interest rates rise, your policy’s rates will rise as well. A rate usually has the opportunity to change once a year.
Universal life insurance is more expensive than term life insurance is in the short run, but in the case of an emergency, where your income suddenly stops, universal life insurance can step in and give you the help that you need through cash value withdrawals or loans. It is also a permanent form of insurance. Universal life insurance can also make more money than whole life insurance if it is funded at a high rate.
By law universal life insurance can not be sold as an investment, however. This is a sophisticated product and you should consult an insurance agent before you fund your policy at a max level, because the policy could turn into a modified endowment contract (MEC).
The “cost of insurance” rises over time with universal life insurance, but the amount of premiums paid into the policy may remain level. This is a bit of a complex idea to understand, but in the early years of the policy the payer will be paying more than the cost of insurance in premium, and the excess will fund the interest earning account. In the later years of the policy, the interest earning account will pay the extra cost of insurance over the premium payment.
What about Indexed Universal Life Insurance?
Indexed universal life insurance is essentially the same as universal life insurance, except the premium can be allocated either to a fixed account or an equity indexed account that builds value as index grows. Indexed universal life insurance policies will have one or several of the most common indexes to choose from such as NASDAQ 100 and S&P 500. In this way an index universal life insurance policy is similar to a variable life insurance policy. The difference is that a variable policy will have a number of choices and “sub accounts” spanning more specific asset classes such as mid cap stocks or commodities. The indexed universal life insurance will typically offer the ability to track one, or a couple of major stock indexes and nothing more.
While index universal life insurance is very similar to variable life insurance, it is considered less risky because the money is not actually invested into equities. Instead it is invested in a fund that tracks the performance of the chosen index funds and pays a rate of interest which depends upon how well the funds perform.
The Real Benefit of Indexed Universal Life Insurance
The reason that people choose indexed universal life insurance over other forms is that it offers the potential ability to get a higher rate of return than universal life insurance or whole life insurance, but it is less risky than variable life insurance. It still offers the ability to obtain tax deferred growth of funds just like the other forms of permanent life insurance, along with tax preferred withdrawals (the cost basis is withdrawn first tax free, and the taxable gains are withdrawn last). Internal account fees may also be lower in the IUL policy than the relatively high fees of the sub accounts within a VUL policy.
In addition, any universal life insurance policy (VUL, UL, or IUL) gives more flexible funding options than a whole life policy. A whole life policy can only be funded at the illustrated rate, while owners of universal policies can make additional payments into their policy in order to build cash value faster.
Who Should Get Universal or Indexed Universal Life Insurance?
These two types of policies are permanent forms of life insurance protection. Basically, anyone who thinks that they might not be prepared if an emergency happens should consider universal or indexed universal life insurance. If you need life insurance, and you are interested in a potentially higher rate of return than a universal life insurance policy. Having a policy like this, especially if you start when you’re young, can help provide for an emergency where the income that you had is gone and you have no savings to fall back on, the down payment on a home or even a college education.
Some people prefer to have this type of insurance because they can afford the premium payment now and they know that a certain portion of their insurance premium is invested in the fixed account or indexed account. So, you aren’t paying the full premium amount so that a beneficiary will receive more death benefit upon your passing, you are paying the full premium amount so that you have access to a cash balance that you can use if something comes up that you want to take advantage of – like a business opportunity, or even if you want to have a cushion if you already own a business.
Why Indexed Universal Life Insurance Is Not As Volatile as A Variable Policy
One of the benefits of indexed life insurance is that the insurance company set that up in a way that you will be able to increase the cash value of your account while disregarding the volatility of the stock market. In fact, the money doesn’t actually get invested into the stock market at all, which is something that many people believe to be true about indexed universal life insurance. Instead the rates that the insurance company tracks from the S&P 500 and the other indexes determine what interest rate to use when crediting your cash account.
What makes indexed universal life insurance beneficial is that there is a cap on how high the interest rate can go but there is also a cap on the bottom end, so that there is no risk. This is probably the most unique thing about this type of policy. The volatility of the stock market can be disregarded, but there is still the potential to earn at great interest rates. This is a very good deal for consumers that are trying to minimize their market risk, because traditional stock market based vehicles have been going up and down since the turn-of-the-century.
The Cost of Indexed Universal Life Insurance
Indexed universal life insurance and universal life insurance premium costs are much higher than a term life insurance rate. While someone might pay $300 a year for term life insurance, they will likely pay 10 times that for indexed or regular universal life insurance. You definitely need to have the budget for universal life insurance or indexed universal life insurance because the premiums could be nearly as much is your car payment. That being said, people choose this product because it is a permanent form of life insurance offering flexible funding, potentially a good return, and tax preferred treatment of the cash account.
Summary Of The Features of Indexed Universal Life Insurance
Indexed universal life insurance has a number of features that you will like. For one thing you have a great deal of flexibility with this type of life insurance. That’s because it is up to you what you pay for this type of life insurance. You don’t have to put everything in if you can handle the payment one month, but there are policy minimums that must be adhered to if you want to keep the policy.
You also still get the death benefit with your index and universal life insurance. That’s the point of life insurance in the first place. The proceeds from life insurance that are paid to the beneficiary are usually tax-free. So, you’re not only getting a vehicle to save and build cash value based on the market, you are also getting standard life insurance with the death benefit.
Another nice feature of universal and indexed universal life insurance is that right now the income tax rules say that you don’t have to pay income tax on the growth of your cash account. It is tax-deferred until you start using it under current tax laws.
Of course, the best feature is that you are building the cash value in the first place. What you decide to do with the cash value that your building is ultimately up to you. Many people choose to use this as their retirement plan and others use indexed universal life insurance to save for the college education of their children.
You can definitely benefit from having a large cash value that you can draw at any time. If an emergency happens, you’ll be able to use that money and if you see a huge income opportunity that you need the investment capital for this life insurance is perfect for that situation.
Specifically to indexed universal life insurance, a great benefit is that if the market performs well you’re going to earn more – sometimes a great deal more – than you would with regular universal life insurance or even whole life insurance. The ability to make more money in the policy is what drives many people to choose indexed universal life insurance.
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