Indexed universal life insurance (IUL) is a type of permanent life insurance policy that combines elements of traditional universal life insurance with the potential for cash value growth tied to the performance of a stock market index, such as the S&P 500. This unique insurance product has gained popularity due to its flexibility and the opportunity for policyholders to participate in market gains while having protection against market losses.
How Indexed Universal Life Insurance Works
Indexed universal life insurance operates similarly to traditional universal life insurance. Policyholders pay regular premiums, which are divided into three parts: the cost of insurance, administrative fees, and the cash value component. The cash value grows tax-deferred over time, providing a savings element within the policy.
What sets IUL apart is how the cash value growth is credited. Rather than receiving a fixed interest rate, the growth is tied to the performance of an underlying stock market index. When the index experiences positive returns, the policy's cash value is credited with a portion of those gains, subject to a cap or participation rate set by the insurance company. If the index has negative returns, the policy is protected from market losses, and the cash value remains intact.
Benefits of Indexed Universal Life Insurance:
Market Participation with Protection: IUL policyholders can benefit from potential market gains without the risk of market downturns. This makes it an attractive option for individuals seeking growth opportunities without exposing their savings to significant stock market volatility.
Tax Advantages: Like other permanent life insurance policies, IUL offers tax-deferred growth of the cash value. Additionally, policyholders can access the cash value through loans or withdrawals, which may be tax-free up to the basis (the amount paid in premiums) in the policy.
Flexibility: Indexed universal life insurance offers flexibility in premium payments and death benefit amounts. Policyholders can adjust their premiums and death benefits to align with changing financial circumstances or life events.
Lifetime Coverage: As long as the premiums are paid, the policy remains in force, providing coverage for the policyholder's entire life. This ensures that beneficiaries receive a death benefit regardless of when the policyholder passes away.
Indexed universal life insurance can be a suitable option for individuals seeking the potential for cash value growth while protecting against market downturns. As with any financial decision, it's essential to carefully review the policy's terms, understand the costs, and consider your financial goals and risk tolerance before committing to an IUL policy.
Contact a professional to learn more about indexed universal life insurance.