Index Universal Life

Published on
December 13, 2022
Ayshe Tayfun

Index Universal Life: The Insured Investment Plan

What category would you be in?

What I’ve seen is that high-income earners from the first category usually have a Roth IRA, 401(k), low-risk mutual funds, or bonds to grow their wealth.

These options typically increase wealth slowly but steadily and aren’t very liquid options.

High-income earners in the second category are more likely to participate in the stock market or other riskier investments.

What if I told you that you could have tax-free growth and liquidity with Indexed Universal Life?

Does that mean that any whole or universal life insurance policy is the key to early retirement? No. Index Universal Life or IULs are unique.

When you pay the premiums as an IUL policyholder, charges are deducted first to cover the applicable fees and administrative costs.
The remaining amount becomes part of your policy’s cash value which is tied to an index. The indexed account offers growth potential based on the performance of stock market indexes such as the S&P 500® and the Nasdaq 100 Index® depending on the policy. As the index moves up, the insurance company credits the cash value portion of your policy each year with interest.

What about fixed universal life insurance and variable universal life insurance?

With fixed universal life insurance, your rate of return is a fixed interest rate. With variable universal life insurance, your cash value account is invested in mutual funds and other securities so you’re exposed to more risk.

IUL policies are more growth potential than ULs, but they are less risky than variable UL policies because no money is invested directly in the stock market.
Over time, an indexed universal life policy has the potential to accumulate significant cash value while growing tax-free.

Let’s dial it down more…

What are the key benefits of the IUL?

  • Tax-free growth
  • Tax-free income (not reportable as income)
  • Tax-free death benefit
  • Tax-free long term care benefits (living benefits)
  • Participate in up to double-digit market returns, with 0% downside risk
  • Locked in gains that “reset”
  • Liquidity: Up to 90% of the cash surrender value, at any time for any reason, tax and penalty-free
  • No early withdrawal penalties
  • No IRS contribution limits
  • Flexible contributions

100% protection from loss

If your account gains a certain amount when the market performs well, you’d have earned it. Nothing anyone does or how the market performs the following year could take away what you’ve already earned.

With your gains ‘locked in’ each year and the index value reset at the end of every year, future declines in the underlying market index won’t have any effect on your earnings.

Participating Loans (Interest-Earning Loans)

The money that is borrowed against the policy can be structured as a participating loan. That means that when money is withdrawn for any reason, the interest keeps growing as if that money never left. It also allows the cash to grow tax-free, so when funds are withdrawn, they aren’t reportable as income.
For example, your policy will keep earning interest as if there is $500,000 in the account even after $100,000 has been taken out and the remaining balance is only $400,000.

I create multiple, customized illustrations that help bring this concept to life for my clients.

Flexibility

As with everything else, you want flexibility, especially in your financial commitments when life throws you a curveball.
The IUL allows you to make flexible contributions. You can skip months or even years of adding money to the account/policy. In some years you can make leaner contributions, and in others, you can invest more aggressively.

Long term care insurance

If two out of five activities of daily living are impaired (eating, bathing, getting dressed, mobility, continence, toileting) are impaired, 2% of the death benefit can be accessed each month, tax-free to cover long-term care services.

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ayshe@mathtx.com

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