Is the back and forth about indexed universal life leaving you a little confused about whether these policies are a good purchase or not? It is a common problem with life insurance, and one of the main reasons is that, well, life is complicated. None of has the same personal or financial circumstances, and the huge variety of life insurance policies exist to account for all the many different lives that need to be insured.
An indexed universal life policy is most certainly not for everyone, and anyone who tells you so without finding out more about your goals and capabilities is not out for your better interest. Let's look at some of the pros and cons of the IUL policy to dig in a little deeper.
If you are still unsure on what an indexed universal life insurance policy is, click here.
What makes proponents of IUL insurance think these policies are so great? For most people it is one of the below:
Risk Control – You control your amount of risk and have complete power to determine where your funds will be allocated, not to mention whether your interest will be fixed or tied to equity index.
Flexible Premiums – Indexed universal offers a lot of flexibility in premiums; like most universal policies, you can pay just the minimum to stay protected when finances are tight, or you can pay more and increase the cash value. You may also get a choice of time periods for payments.
The Floor! –This is easily one of the most appealing aspects of an indexed universal life policy. Since your money is not directly invested in the stock market, you safeguard your cash value from complete financial ruin.
How does that work?
The company actually invests its own funds and then sets the interest that you gain based on the market fluctuations. There is a bit of a catch (read on), but the biggest advantage here is that your account does not go negative, even when index goes down.
Rather you just see zero gains – not a great day but not a tragedy either.
Quality Coverage for Cheap – There are two reasons that IUL often represents bargain coverage. For one, management of these policies, from the company's perspective, is very minimal, given that you take on more control.
The other reason is that taking matters into your own hands equals less risk for the company. As usual, the lower the risk for the company, the lower the premiums.
Permanent Death Benefit – Even with the low cost, indexed universal still comes with a permanent death benefit. In some cases, the death benefit can be used for long-term care as needed.
Cash Value Tax-deffered – If you take out less than your total premiums put in and adhere to IRS guidelines, you can create tax-free income. You can also take tax-free funds out through policy loans, which are made against your cash value. In the latter case, it doesn't matter whether you take more than the overall paid premiums either.
In some cases, policy-owners withdraw from the cash value to pay premiums and limit out of pocket expenses later in the life of the policy.
No life insurance policy is made for everyone, and indexed universal has its drawbacks as well. Here are some to keep in mind
Limitations on Earnings – Remember that catch we talked about? The floor that protects you from negative loss has to be paid for somehow, and that happens by putting a cap on the amount of interest you can earn when the market goes up.
This is typically maxed out at 12% on the highest end.
Then again, it's best not to think of an insurance policy as an investment vehicle; you're not trying to get rich here. You're just trying to maximize the ability of your policy to provide for your family when you are gone, and having checks and balances against drastic loss is probably more important than having access to the bigger earnings.
Also, read the fine print because some companies retain the right to change the earnings cap later on, and the less ethical may not be so upfront about this.
May Not Make Sense for Low Amounts – If the face value, or the amount of death benefit purchased, of your policy is on the lower end, you may lose a lot of the advantages of the Indexed universal life insurance. It takes a larger policy to really reap rewards, which is one of the reasons these make sense for wealthier policyholders looking for financial planning tools.
More Control Over Your Funds – This was mentioned as an advantage before, but let's face it – it's not much of an advantage if you tie your insurance to equity indexes and then the index decreases. In a case like this, no interest accrues on the cash value of your policy and you see no profits. It's better than the bottom falling out from under you, but it still stings when your policy goes stagnant.
Want to Learn More?
Still interested in accessing the security of fixed universal life but with the interest-earning potential of variable? Think you have the financial savvy to get more out of your life insurance policy? Or do you posses the patience and ability to learn?