Unstable economic conditions in the global financial market and their following repercussions for days to come, has made managing money and finances difficult many times. Hence, indexed universal life insurance provides a brilliant instrument to escape from such financial havoc in case of any economic meltdown and protect your wealth in a tax-favored and friendly manner.
Indexed Universal Life insurance is a lot like Universal Life Insurance since it provides you an opportunity to manage and administer payment choices and methods along with death benefits long after you have passed away. However, IUL policies are structured in a way that will benefit you and your wealth in the best possible way available. The foremost thing to remember is that it is cash value life insurance. Therefore, the only source of earning interest for IUL policy is via indexed or fixed account, which eventually benefits you by adding into your premium growth and increasing the accumulation of your cash value.
Secondly, indexed and fixed accounts have floor, that is, minimum level of interest you will be credited in any of these respective accounts, depending upon your preference. The typical floor value ranges from 2-3% for fixed accounts, and for an indexed account, it is usually 0%. Your indexed account is supposed to keep a track record of a significant equity index (e.g., Russell 2000, DJIA, S&P 500, etc.) and emerging market trends. The amount of money kept in your indexed account gets the credit interest value based upon the index’s performance and is directly dependent upon cap and participation rate.
It should also be duly remembered that indexed universal life insurance is different than variable life insurance. Unlike the later, IUL does not divide and invest your cash into sub-accounts. Participation rate assists in determining the amount of your cash value that will participate in gains of a tracked index. While the cap is the amount of maximum interest, that insurer will be credited to your indexed account. The overall policy design of IUL is efficient and competent in the market. Before heading towards the pros and cons of IUL, let us explain the differences between life insurance and indexed universal life insurance categorically.
Whole Life Insurance Vs. Indexed Universal Life
Life insurance is generally accepted as a fantastic option for saving accounts. However, in order to formulate and put in place a lasting financial place, indexed universal life insurance will have to be incorporated in final insurance arrangements.
Whole life insurance is different from indexed universal life as it is categorized as a non-correlated asset, which means that it does not record the trends in the stock market. In comparison, IUL insurance is a correlated asset and keeps a thorough check on the stock market since it is indexed to particular sector markers and indices (such as NASDAQ 100, S&P 500, or another, depending upon the sector of choice).
Secondly, they majorly vary in an extension of guarantees and no guarantees. For instance, Unlike IUL, whole life insurance offers guaranteed cash value premium or growth along with death benefits. Whereas IUL does not promises similar guarantees. Moreover, any guarantee that IUL provides is dependent upon the performance of underlying equity index.
Thirdly, whole life insurance offers annual dividends that can increase the insurer’s death benefits and add to the cash value growth if those dividends are used to purchase additional insurances. On the contrary, IUL is based upon credit interest rates determined by participation rate and cap rate of the underlying index, which the indexed account tracks. Therefore, IUL offers no annual dividends and is solely based on credit rates.
Now, Let’s talk about what to choose which is better?
We or anyone out there can not determine which insurance policy is best among all available. The criteria of ‘best or better policy’ depend on your interests and objectives that you want to secure by purchasing a specific policy plan. No plan is without flaws, but only some will go hand in hand with your outlined objectives, and choosing them will be better for you. The pros and Cons of IUL insurance given below will help you make an educated decision.
Pros of Indexed Universal Life Insurance
The primary objective of UIL insurance is protecting your family with the help of death benefits. Although any assistance whatsoever can not fill the loss of loved ones. However, the financial leverage that IUL insurance policy can provide in grieving months can keep matters stable. Additionally, as explained earlier, IUL is a cash value life insurance policy, i.e., it allows the accumulation of cash growth inside the procedure. Moreover, the cash accumulated can easily be accessed and used by insurer whenever he wishes to for any investments or purchasing different kinds of loans and policies. Furthermore, each withdrawal is tax-free; hence, you don’t have to stress about theat.
Index, universal life insurance policy, offers flexible premiums, compared to other approaches in the market, that are relatively rigid in their payment mechanisms. Therefore, those who cannot maintain financial stability throughout the year or their income fluctuates can still avail IUL insurance benefits through flexible premium options. Another helpful pro of IUL is their policy of Locked-in gains. Since they do not invest your money in the stock market and instead they purchase options on market index; thus, your cash will never bear the effects of fluctuation in the stock market. Your annual gains can be easily secured this way with almost correct estimations by the insurance company every time.
Moreover, IUL does not penalize early access or distribution of your accumulated cash. However, withdrawal policies are subject to change as per the circumstances and conditions. Furthermore, IUL insurance is not a tax-free policy; instead, it offers tax-deferred arrangements. Thus, until and unless you have an account, you don’t have to pay taxes, but if the account is closed and you choose to take withdrawals instead of offered policy loans, you will have to taxes as per the recorded growth on your cash. Lastly, compared to whole life insurance policy, index universal life insurance has more potential growth and doesn’t impact the social security of insurers in any adverse manner.
Cons of Indexed Universal Life
Although we’ve talked much about how there will be an increase in your cash value, in reality, there’s a possibility of a reduction in your cash value. In order to escape any undesirable circumstances, make sure to use the policy of flexible premiums in the initial years and only add minimum amounts to your account. Another prominent con of IUL is that with an increase in your age, the insurance cost also increases simultaneously. However, if the policy is designed efficiently, you will be able to find a way to decrease the cost of insurance in later years down the road. Another con is that because IUL policy does not offer any annual dividends, you will have to be prepared to earn less than the estimated credit.
Moreover, by purchasing Index universal life insurance policy, you will be getting mandatory credit caps with it. You can not evade them, as they come at the cost of doing business with IUL policy. So that’s a permanent arrangement that you should be prepared for as well. And for years of negative growth, to provide minimum guarantees and cover losses of the negative year, the company will avail additional percentage that the market index with return backs. So, you would not be able to keep excess returns above the cap rate in case of hefty returns even. And although you would like to add all percentages into your credit, the company will make it up to you in later years. Lastly, unlike its contemporaries, IUL policies and operations are complicated. Hence, you will need an expert’s advice before signing up for any arrangement.
We hope that this article above has highlighted all the pros and cons that IUL brings to the table. Furthermore, we hope that this article will educate you properly or help outline your interest, objectives, and preference. Finally, please don’t hesitate to reach out to our agents for a joint session in case of any queries and questions.