When you’re looking to get life insurance, there are dozens of different factors that you’ll have to consider to ensure that you’re getting the best plan to fit your needs. There are several kinds of plans that you can compare, each of them has different advantages and disadvantages that you’ll need to weigh when deciding which plan is best for you.
Indexed universal life insurance (IUL) is similar to traditional universal life but with several additional benefits that make it function more like an investment vehicle. As with any life insurance/investment product, the advantages and disadvantages of indexed universal life insurance should be understood before making an informed decision regarding whether or not the product is the right fit for your needs.
With indexed universal life, the policyholder has the choice of allocating the part of the premium paid towards cash value accumulation into an equity index account or a fixed account. The policyholder can choose the index their equity index account will track, such as the S&P 500 or NASDAQ 100. Any premium directed to the fixed account will earn a predetermined, guaranteed rate.
Investopedia states that “an IUL policy could be a good investment option for the inexperienced, because there are no actual investment choices to be made … The ideal customer is an individual who wants/needs life insurance, does not have the risk tolerance for a variable product, [but] would take some risk [in order] to receive a crediting rate higher than a fixed rate of return.”
Advantages Of IUL’s
- Higher Market Earnings – Since the policy’s cash value can earn interest based on an index like the S&P 500, the earnings are typically
higher than traditional cash value policies. In fact, many of these policies offer features which compare several indices after the results are in and will give more weight to those performing better than others. This means that you don’t have to guess at which index to put your money in.
- Guaranteed Floor – Many IULs contain a floor rate that determines the minimum interest that will be earned annually. This guarantees the account will not decline from the previous year. The policyholder is protected since funds are not actually invested in the market. There will be no declines in your account due to market downturns.
- Tax Advantages – The cash value in the account accumulates on a tax-deferred basis. Also, the death benefit is paid to the beneficiaries free of any tax liability. The best part is that the cash value can be accessed by either withdrawals or policy loans. Both of which are income tax-free.
- No Limit On Premium Payment – Unlike qualified retirement plans like a 401k, 403b, SEP or IRA, there is no cap on the amount of cash that you can pay into the policy. This allows your cash value account to grow at a significantly faster rate.
- Flexibility – Since IUL’s are similar to a traditional universal life policy, the periodic premiums and face amount can be changed by the policyholder. Let’s assume that you need to stop funding your policy for a year or two because your finances have changed. You can do it.
In many cases this policy is used to supplement retirement income. Premiums can be stopped altogether during retirement years and income taken at that time. If you would like to see how this works, use the quote form to the left and we can show you how.
- Guaranteed Tax-Free Death Benefit – As long as the cost of insurance is paid, the policy provides a guaranteed death benefit for it’s beneficiaries. The policyholder may also elect to pay premiums until age 65 and yet receive coverage up to age 100 or beyond. This early payoff can be determined at the beginning of the policy so that the adequate premium will be paid into the policy.
- Reduced Fees – The fees for IUL’s are based on the death benefit rather than the cash account resulting in lower fees compared to mutual funds. So as your money grows, you actually pay less than you would in other investments which charge fees based on the balance of your account. The reduced fees charged can greatly affect the cash growth in your policy over time.
Disadvantages Of IUL’s
- Earnings Cap – The insurer will sometimes place an earnings cap on the cash account that can limit the earnings credited to the account compared with actual earnings in the marketplace. The policyholder needs to be aware of any earnings cap in advance and understand that there may be a maximum amount that can be earned during the index period.
- Participation Rates – Since your money is not directly invested in the index you choose, there may be a participation rate which will dictate how much of the return you will receive. In high growth years this is a great option since the participation rate is usually around 70% to 80%. You would keep 70% to 80% of the gain. While this participation rate prevents you from realizing the full gain, it is necessary to keep costs down as well as provide protection from market loss.
- Mortality Charges – There are mortality and insurance expenses associated with these policies and these expenses will increase as you get older. These expenses are based on the death benefit. So by setting up your policy correctly, you can minimize them later in your life.
- Front Loads – Some IUL policies have a premium load which can affect cash value buildup. The New York Department of Financial Services describes these fees as the “amount charged to cover each policy’s share of expenses of operation … such expenses as salaries, agents’ compensation, rent, legal fees, postage, etc.” These loads generally do not last for the life of the policy and are spread out over a period of time so the impact at any point will be less significant.
Advantages And Disadvantages Of Indexed Universal Life
All life insurance and investment products have advantages and disadvantages. Depending on your individual needs, the IUL could very well be the best part of your retirement plan while also covering your life insurance needs. The IUL is considered by many financial professionals to be a perfect part of any retirement program. Don’t just listen to the advice of someone you see on TV such as Dave Ramsey and Suze Orman on Life Insurance, we are here to personally help you with your needs! We help our clients every day to make the right decisions about indexed universal life insurance.
There are dozens of different factors that you’ll need to consider, like all of the advantages and disadvantages listed above. Not only that, but you’ll also need to see if an IUL is going to be the best use of your life insurance premiums. There are more affordable life insurance options.
If you want to get the cheapest life insurance, the best option is to go with a term life insurance policy. These plans are bought with a pre-determined length of effectiveness. There are a variety of different lengths that you can buy, anywhere from 2 years to 30 years. Because these plans come with an expiration date, there are going to be much less expensive, which can give you the best rates for your life insurance.
There are a few lifestyle changes that you can make to ensure that you get the best rates for your life insurance policy, regardless of which kind of plan that you pick. Before the insurance company approves your application, they are going to require that you take a medical exam, and the results from the exam are going to have a significant impact on your chances of getting coverage and how much you will pay for that policy. Though do not let your health or lifestyle choices hinder you from getting the coverage you deserve, there are other options out there such as a no medical exam life insurance policy that you can look into.
If you want to secure lower rates, you’ll need to improve your health through a diet and getting regular exercise. Both of these are going to help you lose some extra weight, as well as lower your cholesterol, blood pressure, and much more. All of which are going to translate into lower insurance rates.
The best way to secure lower insurance rates is to eliminate any tobacco usage. Smokers are going to pay much more than a non-smoker. In fact, smokers pay twice as much for life insurance coverage, versus what a non-smoker is going to pay.
If you want to ensure that you’re getting the best rates, you’ll want to work with one of our independent insurance agents. Unlike a traditional agent, our independent agents work with dozens of highly rated life insurance companies across the nation. We can bring all of the lowest insurance rates directly to you. No hassle.
To make a safe and informed decision about any insurance product, contact the professionals at Ogletree Financial Services. To get the necessary information about indexed universal life insurance, you can complete the form on the left to get immediate information or contact an insurance professional at 1-800-712-8519.