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An IUL is designed to have cheaper premiums than a whole life with the same death benefit.
Universal life insurance is a type of permanent life insurance, which means it offers lengthy coverage and builds cash value over time. Policies typically last until a certain age, such as 95 or 120. This coverage offers flexibility that other permanent policies — like whole life insurance — don’t. For example, you can adjust the amount you pay in premiums, which may appeal to those with fluctuating incomes.
Universal life policies work in a similar way to other permanent policies. In exchange for premiums, you typically get lifelong coverage, and your beneficiaries receive a payout when you die. You also have the opportunity to build cash value and take out loans while you’re still alive. However, universal life insurance has unique features that set it apart from other types of policies.
Indexed universal life (IUL) insurance is a form of permanent life insurance characterized by flexibility for policyholders. With an indexed universal life insurance policy, you can choose your premiums and how much cash value to assign to a fixed-rate account or an equity-indexed account. IUL policies normally cap returns but also guarantee a minimum interest rate, providing a range of predictable returns and financial stability.
Index Universal Life (IUL) Insurance is a form of permanent life insurance characterized by flexibility for policyholders. With an indexed universal life insurance policy, you can choose your premiums and how much cash value to assign to a fixed-rate account or an equity-indexed account. IUL policies normally cap returns, but also guarantee a minimum interest rate providing a range of predictable returns and financial stability.
IUL insurance offers a cash value component as well as a death benefit. Insurers decide which stock market index is tied to the cash value account of the policy.
These indexes are often the S&P 500 index or the Nasdaq Composite. Cash value funds typically earn a variable rate of interest but are also characterized by interest rate guarantees. Some insurers also offer fixed-rate accounts, which provide added options to manage the policy’s performance.
IUL policies can be more volatile than fixed universal life policies but offer less risk than variable universal life insurance policies because IULs do not invest in equity positions.
Aside from IUL death benefits and cash value typically, IUL policies are best for individuals who want to lower their taxable income all in the form of death benefit and cash value.
An IUL policy has adjustable premiums, just like universal life insurance, but it provides enhanced flexibility by allowing policyholders to skip or underpay premiums and in some cases, adjust the death benefit. These decisions are based on how you want to invest the cash value.
When a policyholder makes a premium payment, some of that amount pays the cost of insurance on the insured’s life. After fees are paid, the remaining balance is added to the policy’s cash value. That cash value is then invested in an equity index, and the policyholder earns interest within a guaranteed range. A minimum percentage return is guaranteed, but this is offset by capping out at the top end of the return, typically between 8% and 12%. This may make IULs more attractive as an investment than whole life insurance, which earns a smaller rate of return.
IULs also let you add riders such as long-term care to cover nursing home costs or an accelerated death benefit rider that pays benefits if a policyholder is terminally ill. In addition, IULs enjoy tax-free capital gains unless the policy is abandoned before it matures, which is a distinct advantage over other financial instruments that may tax capital gains upon withdrawal. Death benefits can also be passed on to beneficiaries tax-free. Plus, there are no impacts to Social Security benefits and no required minimum distributions, unlike a 401(k) or traditional IRA.
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