IUL's Pro's & Cons
In's & Out's of Index Universal Life
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Emerging into the Life Insurance market today with much popularity are Indexed Universal Life Insurance plans...known also as IUL's. There are many books on why one should use them such as the "Safe Money Millionaire" book which I've read a few times myself.
We've all seen the articles on "Lock in, don't Loose the gains"..."Reduce Volatility...remove the downside of Market Risk", "The Retirement Crisis", "Investment not Expense", etc. So, what actually is an IUL, what good can it do you, and what should you watch out for when looking at different IUL products?
To break it down in layman's terms: an IUL is an Indexed Universal Life insurance plan. An individual purchases an IUL policy which then allows them to "over fund" the policy premium to create cash accumulation in their account...to use at a later point in time (loan...tax free or withdrawal...taxed)...or they can leave their cash accumulation in the plan to pass on to their beneficiary, along with the death benefit, when they perish; usually tax free.
To sum it up: premiums not used for the cost of insurance and policy fees are held in an account: either an indexed interest or fixed interest account. Most plans allow you to move funds between accounts on your segment date, which allows you to get the most out of your money. On the top end Indexed interest have a cap and on the bottom they have a guarantee interest rate that the account will not drop below...usually 0-2%.
This Indexed fund generally follows the S&P 500, EURO or the Hang Seng market...or all three, but is not actually "in" the market which avoids the risk of the market. So, if the market crashes the policy owner does not loose any funds since the money is not actually in the market. Policy owners find this feature very attractive because...nobody wants to wake up and find they've lost 40% of their money in a market crash. This has happened to many whom have placed their money "in" the market in the past (Stocks/401k/IRA, etc.).
Why all the hype about IUL's? IRS and the Government approved them...they are totally legal and set up for use by them and everyone else. Indexed Life Insurance policies help grow Wealth with No Market Risk, allow tax free loan withdrawals (after Cash Accumulation is built to a certain level; usually about 10 years and much sooner if a lump sum is deposited up front), and offer Living benefits such as Long Term Care, Terminal Illness or Critical Illness options (Can you say Disability). Who wouldn't want a plan in place that protects there family from the financial issues of death, which accumulates cash that will double their wealth every so many years (depending on interest rates), helps beat inflation, includes tax free withdrawals and Living Benefits...just to name a few of it's many features? But...then again...what's the catch. Below you will learn about the Pro's and Con's of an IUL Life Insurance Policy so you can decide if it makes sense for you to use it for your family's living and retirement goals.
MAJOR BENEFITS (PRO's) OF INDEXED UNIVERSAL LIFE INSURANCE (IUL's)
There are many benefits of Indexed Life Insurance (IUL's) of which several are listed below. Each policy has it's own benefits "baked in" and some have riders available for purchase to enhance the IUL policy experience.
* Because it's a life insurance policy if the insured dies prematurely the death benefit and any cash accumulation/interest passes to the beneficiaries of the policy...usually tax-free and with out going through probate.
* With some IUL's the policy owner has the right to choose from a number of indexed strategies as stated above...S&P 500, EURO, Hang Seng to name a few of the choices...depending on the policy and the insurance companies. This allows for greater interest options.
* Like other cash-value life insurance policies, Index Life Insurance offers policy owners withdrawal privileges (taxed) and loans (tax free). Most loans do not have to be repaid. It is important to know the specifics of the policy you choose...some even offer "wash loans".
* The cash value in a indexed life insurance plan grows on a tax advantaged basis: tax-advantaged or tax-free depending on how you take the withdrawal. You can use the withdrawal as a down payment on a car, house, for college funding or vacations...you get to choose because it's your money. First in first out applies to these funds which allows them to be tax free when taken as a loan. And...you don't have to repay the loan because it's your money. Obviously it makes sense to re-pay the loan if you are still young so your money keep growing for future use in retirement. A lot of companies offer "wash loans" which means that you pay a low interest rate and they pay you at the same time making the rate .25% or such...which is VERY minimal. Your money earns interest even when you pull it out in a loan. Example 2.75% loan fee and 2.50% to you with you owning the .25% difference.
* With many plans once you have accumulated funds if you have a "bad month" financially, and can't make your payment, your cash accumulation can help make the payment for you. This comes in handy when in between jobs and funds are low.
* IUL's offer different features such as Living Benefits which allow you to use your Death Benefits in advance (up to a specific amount). I've noticed that with a 500k Death Benefit funds would normally last about 4 years with a 5,000/month payout. Keep that in mind when choosing how much death benefit to purchase. One Living Benefit offered by many companies is the Long Term Care Benefit which allows one's death benefit to paid out in monthly with loss of 2 of your 6 ADL's. A Critical Illness Benefit would pay out the death benefit in advance, usually lump sum, when diagnosed with 12 months of less to live. These Living Benefits allows you to choose a plan which will benefit your future health issues and goals for financial security for your family all in one policy. Of course the LTC Living Benefits are not actually a replacement for LTC products. You must weigh the benefits of what is best for your current and future situations based on family history.
* IUL's offer different "indexed caps or options" make sure to understand what your policy offers before purchasing as you will want to purchase one that has your interests in mind. They can be set up with LTC in mind as the major component, or Asset Accumulation as the main focus, or a little of both. A good agent will make sure to meet your needs when choosing the correct insurance company and plan for your specific situation and goals.
NEGATIVES (CON's) OF AN INDEXED UNIVERSAL LIFE POLICY (IUL)
Insurance agents hear it all the time...Everyone wants to know: "What is the catch"..."It sounds to good to be true"..."You don't get something for nothing". So, what is the catch? What are the downfalls to using an IUL plan for Cash Accumulation or Living Benefits?
* Indexed Life Insurance is subject to surrender charges if you stop paying premiums during a "certain amount of time"...such as the first 5 or 10 years if you have not fully funded it on day one. These charges can be quite high leaving you with no cash value if you cancel too early in the policy...not to mention owing taxes. These plans are for long term use...not short term, unless funded up front in which case funds could be withdrawn sooner verses later. It seems that most plans, depending on how much you over fund them take about 7-10 years to "see" the cash accumulation. And, as we all know, funds grow based on the rise and fall of the market. So, if interest rates are low for a few years your funds might not grow as planned. Make sure to review your IUL once a year with your agent of record to make sure it is performing as you would like...just like other vehicle for cash accumulation.
* IUL's are usually set up for long term cash accumulation. They are not a "buy in" and "jump out" set up...or a get rich quick deal. They are for the long haul...for life. Such as a whole life plan, yet with better interest crediting features for higher potential growth. Your funds grow best when you are in it for the long haul...such as money for retirement, or a down payment on a house, college funds...down the road. If you would like to use funds sooner to purchase a car or such you would need to fully fund the account each year (of course making sure to not over fund it and there for turning it into a MEC...Modified Endowment Contract which would be subject to tax). Make sure to work closely with your Agent to create your IUL in a way which would allow you to fund it to the max you would like with out it becoming a MEC.
* IUL's are generally not suitable for short-term insurance needs due to the high costs of purchasing the insurance fees/costs (usually less than 401k fees/costs in the long run and with more control), and due to the cost to surrender a policy due to lack of funding the policy premium payments (Loss of job and can't "fund" the policy or make the premium payments for an extended period of time and your cash accumulation runs out).
* Not all IUL's offer the same "indexed caps or options" make sure to understand what your policy offers before purchasing as you will want to purchase one that has your best interests in mind. IUL's are different so you must read your policy information to make sure to purchase one that has your financial well being planned into it...such as Living Benefits (see above), or focuses on Cash Accumulation or other riders such as child riders. Your agent may forget to focus on Your options so you must make sure to know what comes standard with your plan and which are riders that you may want to have on your plan for your specific needs. Not all Index Universal Life plans (IUL's) are a like. Which is also a good thing allowing you to choose the best one for your goals, retirement needs, and current situation.
TO SUM IT UP: If you are looking for somewhere to Accumulate Cash with a good rate of return on your money and no chance of loss then an IUL bares further review. Become your own banker...pay yourself first...you deserve it now and in the future.
It is always important to read and understand any insurance policy before purchasing. Ask your agent for specific information on the policy being suggested to you before purchasing it. Not all IUL's offer the same "benefits" or "indexed" options. A good agent will listen to what you are looking for a suggest a few different plans and insurance companies so you can make an informed decision.
Kyla 971-327-5792 www.TheIULadvantage.com www.taxfreeretirements.net