Indexed Universal Life Insurance Policies: Priceless or Worthless?

Universal Life Insurance Policies

Indexed universal life insurance policies have garnered a combination of curiosity and excitement for people looking for a way to build income while providing life insurance benefits for survivors.  The policies may provide substantial payouts because their cash values use interest formulas that rely on the stock market. Payouts are tax-deferred, which means people pay taxes on such accounts in the future.

Beliefs that these policies could vastly increase wealth has prompted several internet reviews on indexed universal life insurance companies. If people conduct research and tailor such policies to suit their needs, such policies can be useful. For other people, the policies may not be the unlimited sources of tax-free money they believe them to be.

What are IUL’s?

Indexed universal life insurance policies are what as known as permanent life insurance. This means that unlike term life insurance, where policyholders pay premium for a limited time span, universal life policies require people to pay premiums for the balance of their lives. This prolonged payment structure makes universal life insurance policies similar to whole life, straight life, or ordinary life insurance policies.

There are two components of indexed universal life insurance policies. The first part is an annually renewed life insurance policy. The amount of the benefit is flexible and the insured party can increase or decrease its value as long as he or she meets all of its requirements.

A big difference between indexed universal life policies and whole life policies concerns death benefits.  In whole life policies, as long as people pay their premiums, the death benefits will remain until the policies mature. In universal life policies, the benefits will lapse if the cash value is insufficient to cover the policies and their upkeep costs.

The cash value is the second or indexed portion of indexed universal life insurance policies.  Any excess in premium is credited to this portion of the policy. Interest is also added to this monthly amount. There are also principal protections in place. This value fluctuates according to the activity of investment indexes such as the S&P 500.  The insurers set minimum bottoms for the policies’ cash values. This way, there is no risk to their investments.

Since such policies do not deduct losses in the stock market from their cash value, some people believe that they are risk-free ways to invest in the stock market.  This is a fallacy.

Cash values of such policies may rise due to the health of the stock market, but the insurers do not invest the cash values into stocks. Insurance companies use their own calculations to create formulas to determine the cash values of universal insurance policies.

The insurance companies’ performances can determine the accrued interest of the policies.

There are minimum interest amounts attached to the policies’ monthly cash values. This ensures that the values rise on some level, no matter how nominal the amounts.

Financial indexes for stocks and bonds also play a role in the insurers’ formulas.  The market index determines the amount of gains the policyholders receive.

Indexed Universal Life Insurance Pros and Cons

When studying indexed universal life insurance policies, it is important to evaluate the pros and cons of the policies carefully. There are advantages and disadvantages:

Advantages of indexed universal life insurance policies:

  1. Policy gains grow without the deduction of taxes. Such policies can be considered tax shelters for contributions made to the cash value.

  2. There are no limits or caps on the contributions the insured may make to the cash value of the premiums.

  3. The stock market is only used to determine if the cash value of the policies rises or stays the same. The insured does not face the possibility of loss.

  4. An indexed universal life insurance policy is flexible. Insured people can make decisions about the amount of risk they want to take, change benefit amounts, and use riders to adjust policies to suit their needs.

  5. Indexed universal life premiums start out lower than similar whole life insurance policies at the beginning of the insurance contracts.

  6. The insured can make withdrawals without penalties from the cash value. This may be useful if they need cash.

Disadvantages of indexed universal life insurance policies:

  1. The policies may be confusing and hard to understand. The insured will need to dedicate time to study and understand their policies.

  2. Policies purchased from indexed universal life insurance companies may be more expensive than term life policies.

  3. Various caps and rates may greatly reduce the insured people’s gains on their cash values. These debts may also rise during the lifetime of their premiums. The participation rates and the future premium increases may exceed the amount of protection they receive from their policies.

  4. Since the earnings on the policyholders’ cash value will never increase at the rate of the actual stock market, separate life insurance policies and investment alternatives such as IRA plans may offer better gains.

  5. The performance of the policies may fall short of expectations. Such policies are a more conservative way of building wealth.

Is an Indexed Universal Life Insurance Policy Right for You?

The insured should read reviews for indexed universal life insurance policies to decide if they are good investments for them. The suitability of such policies depend on a person’s specific needs.

If you have substantial wealth and want to use the tax-deferred cash value to protect large inheritance sums from estate taxes, such policies may be advantageous for you. High-income earners and insured parties who are business owners may find these good policies as well. Since they offer tax-deferred features and do not require people to make minimum contributions, such policies may be good places to store large inheritance endowments to avoid paying hefty taxes. For insured parties who can maximize the number of contributions to their policies, the plans may represent a safe and reliable income strategy.

If you do not have a high income and are looking to build income, these policies may not a good investment idea for you.  Since the policies’ cash values are not directly invested in the stock market, when the market is doing well, your cash values will not fully benefit from a bull market.

Since insurance companies apply caps, administrative costs, and various rates to gains, such policies may be a less satisfactory type of investment. Although there is some risk involved with investing directly into the stock market, this strategy may still produce higher earnings than the revenue generated by the interest on cash values. There may be a high cost to pay for the cash value protections of such policies.

Insured people who wish to grow wealth may find that such policies are not the best way to achieve it. If individuals do not have pension plans, such insurance policies may reduce their benefits.  Indexed universal life insurance policies work best when they are paired with additional retirement plans.  As stand-alone options, indexed universal life insurance policies may not the best choice to grow investment income. The earnings from the stock index will not rival those achieved with a brokerage firm. Opt instead for lower-cost term life policies and separate investment plans.

Also, you should know, the Texas Department of insurance just sent out a letter to universal life policies owners (UL’s & IUL’s) to remind them to check with their agents yearly to discuss interest rates. This would be prudent of policy owners.

Indexed universal life insurance policies may be good investment options or unsound ones. Researching such policies can determine if they are right for you.

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