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 u