What is an IUL?
Indexed Universal Life Policy
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What is an IUL?
An IUL stands for “indexed universal life” policy. Like all types of life insurance, IULs produce a death benefit. But, an Index Universal Life policy is a type of universal life insurance that gives more than just a death benefit. One type is a fixed rate, which is subject to inflation. Another type is a variable rate, which is invested in the stock market, so it has too much risk. With an Indexed Universal Life policy, your principal is guaranteed*, while your interest rate is based on the performance in the market. You could get the best of both worlds. Because of this, the IUL can earn a reasonable rate of return, and help retirees earn retirement income, tax-free.** In addition, beneficiaries get their inheritance without having to go through probate.
Many people use an IUL as part of their financial strategy in retirement. With an IUL, the insurance company holds your money. Therefore, your cash value has protection. In fact, with this product, your money is not actually in the market. Instead, you can choose to have your rate of return linked to an index. In this way, IUL owners can earn a reasonable rate of return when their index is up. Yet, when the index is down, they don’t lose their cash value. No matter what happens in the market, an IUL protects the money you put into it.
How Does an IUL Work?
When you fund an IUL, a portion of your premium funds for life insurance coverage. The rest (minus costs), is your cash value. This cash value may earn an interest rate, linked to an index. The index is not invested directly in the market. So if your IUL’s index were to go up, then your earnings may be credited with a reasonable rate of return over time. But, if the market drops, your cash value does not. This is because your principal cash value is never invested directly in the market.
Also, some policies allow you to pick multiple indexes, instead of just one. So, it is possible to actually “diversify” within your IUL. For example, you may pick to have a share of your available cash value earning a fixed rate of interest. Another part of your money may be earning interest from a different index. And, the third chunk of your money could be linking to a different index. Because the possibilities are endless, it is essential to learn about all the options available to you.
Living Benefits of Indexed Universal Life Insurance
In addition to simply providing a death benefit, IUL’s can assist retirees in multiple ways. First, an Indexed Universal Life policy can provide extra flexibility in contrast to some other financial channels. Because an IUL is an insurance product, the retirement and tax laws surrounding it are different from accounts that deal in securities, like 401(k) or IRA accounts. For instance, IULs have no contribution limits, no income limits, and no income restrictions. Additionally, unlike some retirement strategies, IULs have no required minimum distributions (RMDs) or fines for withdrawing money before the age 59 1/2.
It’s pretty protected. Your cash value stays the same, even if there are losses in the market. Plus, your money accumulates based on a stock market index, rather than the market itself. So, you may see some interest when the index is up, but you don’t lose when the index is dropping. More importantly, you secure your earnings, keeping them from risk. For many retirees, this protection gives them peace of mind. Mainly because no one ever really knows what may occur in the stock market.
For example, you can finance your policy with one lump sum of money. Or, you can finance it over time. Additionally, because your cash value is fluid you can access it for income, without paying income tax. Also, your cash value can grow tax-free. What may be very important to you is that your death benefit is accessible while you are alive, tax-free to cover long-term care costs. There are many possibilities, so be sure to speak with us about which ones may be right for you.
Protect Your Legacy With an IUL
Of course, IULs also give policyholders a way to protect their legacy. For instance, the money left for your beneficiaries is generally much more than you initially put into the policy. Plus, the amount available as a death benefit may increase with time. Because it is a life insurance policy benefit, your loved ones won’t need to go through probate to have access to your money. Additionally, the income your family receives from your IUL is not taxable and avoids probate.
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*Backed by the claims-paying ability of the carrier.
**Proceeds from an insurance policy are generally income-tax-free, and if properly structured, may also be free from estate tax. Income-tax-free distributions are achieved by withdrawing to the cost basis (premiums paid), then using policy loans. Loans and withdrawals may generate an income tax liability, reduce available cash value, and reduce the death benefit, or cause the policy to lapse. This assumes the policy qualifies as life insurance and is not a modified endowment contract. The Host and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. This content is not intended to serve as the basis for any investment or purchasing decisions, nor does it recommend or involve the purchase, holding, or sale of a security. All figures herein are hypothetical and for illustrative purposes only to explain general concepts. No figure is to be relied upon as being accurate nor a guarantee or projection and is meant only as a partial overview of some relevant features and benefits of general insurance products that may be in the marketplace, and whose availability will be dependent on the State of residence of the consumer, and their individual suitability for the product they are wanting to purchase. Where insurance products are mentioned, any and all guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.