Indexed Universal Life Insurance Policies
What are the advantages of indexed universal life insurance? One of the best features of an IUL is its ability to make use of current stock market gains without the risk of exposure to risk. This means that you don’t have to hold on to stocks that have a low value just to enjoy the benefits of your I UL policy. And it also does this while building up a cash death benefit that your beneficiaries are entitled to receive tax-free after you die.
Other advantages of indexed universal life insurance are: Unlimited investments: You earn premiums that grow tax deferred. With these policies, you get to choose from many investment options, which can be both growth oriented and tax efficient. Also, since the premiums are tax deductible when they are paid, you can save more money in taxes. You also have the freedom to change your investment options. And since the policies pay dividends regularly, you also have the potential to earn returns that exceed the cost of your premiums, if you invest well enough.
Variable universal life insurance policies are another type of I UL. Here, your insurer would allow you to choose a variety of insurance products such as a line of credit, a cash value account, or even both. For example, if you want a steady stream of income for your golden years but are concerned about rising interest rates, you can opt for an interest only policy. With a fixed interest rate, you would pay premiums until you either withdraw or borrow the money. A guaranteed interest rate on these types of plans allows you to borrow up to the amount of your account and earn interest that is less than the amount you are guaranteed to repay.
The drawback of an indexed universal life insurance plan is that it typically does not pay taxes until distributions are made. Once the death benefit has been achieved and the insurance company receives its tax break, the death benefit will be paid to the beneficiaries, who typically include loved ones. For this reason, the death benefits tend to be much smaller than those of other forms of insurance. If you are planning to use these policies to pay taxes, you should ensure that the beneficiary will get more than you pay during lifetime, or your death benefits will become taxable.
Both types of plans typically have similar features, such as guaranteed premium payments and tax-qualified accounts. The main difference between the two is that with indexed universal life insurance, the premiums you pay remain constant, whereas the annuities pay tax-qualified withdrawals each year, irrespective of how much you’ve made in the previous year. Also, both types of policies provide coverage for a specified period of time. The downside to the annuity is that the payments are fixed, whereas the premium payment can vary each year. Furthermore, if the market goes down, the premiums also go down.
As opposed to universal and permanent life insurance policies, indexed universal life insurance policies provide coverage only for a specified period of time, which is usually the remaining life expectancy of the policy owner. This means that if the insured dies during the coverage period, the beneficiary does not receive any payment. Premiums are usually high and are subject to change every year.
Another disadvantage of indexed universal life insurance policies is that the interest accrued on the cash value growth is not tax deductible. With a guaranteed minimum interest rate, however, your interest is tax deductible up to the applicable tax bracket. Also, the interest accrues faster than the tax-deferred portion of any gain on the cash value growth. This means that you could owe more taxes over the lifetime of the policy than you would with a traditional annuity or other fixed income plan.
These are some of the pros and cons of indexed universal life insurance policies. If you are looking for a guaranteed minimum interest rate along with coverage that guarantees at least a fixed rate throughout the term of the policy, then an indexed universal life insurance policy may be right for you. Just be sure that you check out the details of the contract and consult with a financial expert before signing on the dotted line.