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Why Life Insurance?
Overall, life insurance provides cash when you need it most.
Your life insurance policy can deliver a specified sum of money when you need it. Upon your death, your family will receive your policy payout immediately. And that death benefit is generally not subject to federal income taxes. For example, a $500,000 policy provides $500,000 in death benefit proceeds directly to your beneficiary.
What Is Indexed Universal Life Insurance (IUL)?
Indexed universal life (IUL) insurance policies can help you to build wealth while leaving behind a death benefit for your loved ones. These policies put a portion of the policyholder’s premium payments toward annual renewable term life insurance, with the remainder added to the cash value of the policy after fees are deducted. On a monthly or annual basis, the cash value is credited with interest based on increases in an equity index.
While IUL insurance may prove valuable to some, it’s important to understand how it works before purchasing a policy. There are several pros and cons in comparison to other forms of life insurance.
KEY TAKEAWAYS
- Indexed universal life (IUL) insurance policies provide greater upside potential, flexibility, and tax-free gains.
- This type of life insurance offers permanent coverage as long as premiums are paid.
- Some of the drawbacks include possible limits on annual returns and no guarantees as to the premium amounts or future market returns.
- An IUL policy may be canceled if you stop paying premiums.
- In general, these policies are best for those with a large up-front investment who are seeking options for a tax-free retirement.
Understanding Indexed Universal Life Insurance
IUL insurance is often pitched as a cash value insurance policy that benefits from the market’s gains tax-free—without the risk of loss during a market downturn.
When you purchase an IUL insurance policy, you’re getting permanent coverage as long as premiums are paid. Your policy includes a death benefit, which is paid out to your named beneficiary or beneficiaries when you pass away. But the policy can also increase in value during your lifetime through a cash value component.
The cash value portion of your policy earns interest based on the performance of an underlying stock market index. For example, returns may be linked to Standard & Poor’s (S&P) 500 composite price index, which tracks the movements of the 500 largest U.S. companies by market capitalization. As the index moves up or down, so does the rate of return on the cash value component of your policy
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