Life Insurance: What is an IUL?
An indexed universal life (IUL) insurance policy is an insurance policy that comes with many benefits. Yes, they provide a death benefit, but they can be useful to retirees who purchase them in several other ways. First of all, policyholders may earn a rate of return on their max-funded IUL. This is also true for some other insurance policies, but IULs have an advantage. An IUL may also be a way to protect your money. Additionally, you may see a reasonable rate of return over time, because the earnings of an IUL are linked to an index. Hence, the name “Indexed” universal life insurance. Additionally, retirees may use IULs as a tax-free* retirement income source.
An IUL may be a key part of your overall retirement strategy.
So, what is an IUL and how does it work?
In exchange for your premium, an insurance company gives you a life insurance policy. The IUL policy is typically “max-funded.” This means that the total life insurance premium is paid upfront. This way, the insurance company keeps your money protected. The policy is linked to an index, but the money in it isn’t directly invested in the stock market. For this reason, retirees with IUL policies may be able to earn a rate of return when the index in question is on an upward trend. Conversely, no money is lost when the index is trending downwards. An IUL is a possible way to keep your money protected regardless of market conditions.
How do IULs work?
Essentially, when you pay your full premium to fund an IUL, some of that money goes to paying for life insurance coverage. After that coverage, and minus fees, the rest of the money is your cash value. You may earn an interest rate on this money because it’s linked to an index. However, it isn’t reliant on the stock market. For example, the S&P 500 index may yield a similar rate of return to that of the S&P 500 stocks. The money isn’t directly invested into the stocks, however. When the stocks decline in value, your IUL cash value is unaffected.
You may also have the option to link your IUL to multiple indexes. This spreads the potential rate of return, rather than just relying on the performance of one index. Some of your IUL may be earning a fixed rate of interest, a different one may provide an alternate rate of return, and a third may be connected to provide another result. Due to all these possibilities, retirees should learn about all the options available.
There’s no way to learn where tax laws will land in the future. Furthermore, we don’t know how those future changes will impact your money. However, there may be strategies to help. An IUL may provide peace of mind. It can act as a way to protect wealth for your family. Your beneficiaries may receive a larger sum as death benefit than what you initially put into the policy. IULs also don’t require probate court. This means the death benefit goes straight to the people you intend to receive it. There is also no tax on the amount they receive. (Note: If you have any tax-related questions, be sure to consult a qualified tax advisor.)
An IUL insurance policy isn’t just about leaving money for your loved ones when you pass away. In fact, there are several additional benefits. First of all, IULs provide you with some flexibility. Tax laws function differently for it compared to other retirement accounts. This is because it’s a product offered by an insurance company. Plans like 401(k)s or IRAs come with contribution limits and restrictions on income.
An IUL, however, doesn’t have any of these. Additionally, they don’t come with a required minimum distribution (RMD.) There are RMD requirements for other accounts, where account owners must withdraw the money by a certain age. Also, unlike other accounts, IULs don’t have a fee if you decide to withdraw your cash value earlier than the age of 59 1/2.
Safety is another factor that cause retirees to consider purchasing an IUL. Because your value remains constant regardless of market fluctuations, it isn’t at risk. This protection helps some retirees have peace of mind. Obviously, no one knows what will happen in the stock market. For this reason, an IUL may be an important part of a strategy for safety in retirement.
Another key benefit? You can fund your policy all at once! Perhaps you’ve already maxed out your retirement accounts, but still want to save additional money. An IUL may provide a way to keep some of your money safe while providing tax-free* income in the future. In addition, you might be able to protect your gains as your cash value grows. Some retirees also like the fact that they don’t have to take their money out at any time. Instead, they can take it out whenever they need it. Alternatively, they may decide to simply keep it there as another retirement savings option.