Indexed Universal Life Insurance (IUL) is a popular topic for those looking to combine life insurance protection with the potential to build cash value. Unfortunately, social media sound bites are often high on praise and low on details. Let’s break it down in a way that’s easy to understand.
How Does an IUL Work? When you purchase an IUL, you’re buying a life insurance policy with a twist. Like any life insurance, it provides a death benefit to your beneficiaries when you pass away. But what makes an IUL different is that it also has an investment component tied to a stock market index, such as the S&P 500. You pay your premiums, and a portion of that money goes towards an annually renewable one-year term life policy. The premium on this policy is not guaranteed, so the insurance expense will go up as you get older, leaving less of the premium for investment. The other portion goes into an account that’s linked to the performance of a stock market index. If the index does well, your cash value could grow. Most IULs come with a cap on how much you can earn in a good year, as well as a floor to protect you from losing money if the market tanks.The idea behind this is that an IUL offers the potential for growth without the full risk of the stock market. You won’t see the same high returns as a direct stock investment, but you also won’t suffer the same losses.
You can borrow from your policy. One of the appealing features of an IUL is the ability to borrow against the cash value of the policy. Many sales pitches will say, “Be Your Own Bank.” Here’s how it works: Once you’ve built up enough cash value, you can take out a loan from the policy. The loan is not considered income, so it’s not taxable. However, there is interest. You don’t have to go through a lengthy approval process like you would with a traditional loan, and there’s no need to worry about your credit score. You simply request the amount you want, and it’s yours to use as you please—whether for an emergency, a big purchase, or even to supplement your retirement income. Here’s the catch: It’s important to manage this loan carefully. While you don’t have to repay it, any unpaid loan amount, plus interest, will reduce the death benefit available to your beneficiaries. If the loan balance gets too high (for example, exceeding 90% of the cash value), the policy could lapse, leading to potential tax consequences and the loss of the death benefit.
The Bottom Line is an IUL can be a very complex financial tool, and it’s not without risks, particularly if you borrow heavily against the policy. If you’re considering an IUL, it’s wise to speak with an unbiased financial advisor to make sure it aligns with your overall financial goals. If you need help understanding and implementing this product, consider meeting with your Francis planner today!
