What is indexed universal life insurance?
Indexed universal life (IUL) insurance is a type of life insurance policy that allows you to accumulate a cash value in either a fixed account or an equity-indexed account. Unlike other types of universal life insurance coverage, IUL policies offer the opportunity for cash value growth based on the performance of a stock market index, such as the S&P 500.
They also allow you to decide how to split the percentage of funds between fixed and indexed portions, giving you some control over the acquired cash value of your policy. In this article, we’ll explore the features, benefits, and considerations of indexed universal life insurance so you can understand the pros and cons of this type of coverage and determine whether it’s a good fit for you.
Pros of Indexed Universal Life Insurance
If you’re considering an indexed universal life insurance policy, there are several benefits of this type of coverage, including:
Tax-Deferred Growth: The cash value growth in an IUL policy accumulates on a tax-deferred basis. This means that as a policyholder, you may benefit from potential growth without incurring annual income taxes on the cash value growth.
Cash Value Growth Potential: IUL policies provide the opportunity for cash value growth based on the performance of a stock market index, allowing policyholders to benefit from potential market gains.
Protection Against Market Volatility: While IUL policies are linked to the performance of a stock market index, they often come with caps or participation rates that limit the policyholder's exposure to extreme market fluctuations, offering a degree of protection. Many IUL policies come with downside protection, ensuring that the cash value does not decrease due to negative movements in the selected index.
No Social Security Impact: The cash value accrued from an IUL won’t count toward the earning threshold for your Social Security benefits, and nor would any loan you borrow against the cash value. Therefore, you could take a loan from your IUL policy to supplement your Social Security benefits without compromising your benefits.
Cons of Indexed Universal Life Insurance
While an IUL can be a great option for some individuals, there are certain drawbacks to this type of life insurance coverage, including:
Potential Underperformance: In some market conditions, IUL policies may underperform compared to other investment options, which can affect the policy's cash value growth and overall value.
Limited Returns: The upside potential of the cash value growth in IUL policies is usually capped, meaning that policyholders may not benefit as fully from strong market performance as they would with other investment options.
Costs and Fees: IUL policies often come with various fees, including administrative fees, cost of insurance charges, and expenses related to the indexing strategy. These costs can reduce the potential returns and affect the overall value of the policy.
Surrender Charges: IUL policies may have surrender charges that apply if the policy is surrendered or if there are early withdrawals, limiting the policyholder's flexibility and access to the cash value within the policy.
While indexed universal life insurance offers the potential for cash value growth linked to market indexes, it also carries inherent risks and complexities that you’ll want to evaluate based on your financial goals and risk tolerance.
Let SelectQuote Help You Find the Right Indexed Universal Life Insurance Plan
If you’re wondering whether indexed universal life insurance is right for you, SelectQuote can help. In just minutes, we can search a variety of IUL policies from different trusted carriers and compare the results on your behalf. With nearly 40 years of industry experience, we’re well-equipped to help you navigate your options and find the right fit for your needs.
