Indexed universal life (IUL) policies differ from traditional whole life policies in that they allow cash value accumulation tax-deferred. Their accumulation is determined by market index performance rather than contractual guarantees, so IUL policies provide tax benefits while offering potential cash accumulation benefits.
Clients tend to embrace IUL when properly explained and illustrated; however, many agents fail to grasp all of its associated fees.
Fees
IUL policies typically provide policyholders with investment options that track various stock market indexes. They may also feature caps and floors to protect policyholders against excessive losses; however, these options vary between insurance companies so it is crucial that extensive research be performed prior to purchasing an IUL policy. It is also crucial that they choose a provider with strong financial ratings.
Fees charged by IUL policies can often be substantial, eating into your payments or cash account value. Furthermore, their premiums don’t remain fixed and can increase over time, potentially wiping out any savings in an IUL policy.
One of the key appeals of IUL is its potential for greater returns compared to traditional life insurance products, yet even top policies may underperform other investments. Returns cannot be guaranteed.
Many agents pitch IULs by providing customers with illustrations depicting how the policy’s cash value will increase over time based on projected interest rates, fees, payments caps and participation rates. Although these projections may look impressive they’re not accurate estimates of your policy’s future performance.
Realistically, IULs will return about 3% a year to policyholders. Unfortunately, however, they’re subject to various expenses, including commissions paid to agents and salespeople and various fees charged for these policies that don’t need to be registered with the SEC – giving rise to some noncompliance issues compared with conventional stocks and options contracts.
Participation Rates
As well as fees mentioned previously, many IUL policies also feature participation rates or caps that determine how much of an index return will be credited back to your account. While participation rates tend to be quite low, some of the leading IUL companies provide what’s called “Volatility Control Index” (VCI), which helps smooth out market dips and spikes so you can capture more index gains without risking market losses.
Though an IUL policy may not be suitable for everyone, they may offer attractive benefits to high earners looking to use its tax-free death benefit to secure their family’s future. Also unlike retirement accounts, life insurance plans don’t impose contribution caps and so it may make more financial sense than other forms of investment.
When speaking with an IUL agent, they’ll likely present illustrations showing the cash value growing over time. These projections may take into account interest rates, fees, payments, caps and participation rates predicted; however, they don’t always accurately represent actual performance and can sometimes even prove misleading unless carefully taken into consideration.
Not to forget is that IUL is a hybrid product comprised of both whole life and variable universal life (VUL) policies, meaning its costs of insurance may be higher than other permanent life products and you could experience negative repercussions if established during periods when markets perform poorly – that is due to part of your premium going toward covering these expenses.
Caps
IUL policies offer two investing components, including a fixed cash account and an indexed account. The latter allows your funds to grow alongside market index performance; how much growth depends on negotiated cap and participation rates between insurance companies – each company may offer different caps/rates; therefore it’s wise to do your research prior to choosing an IUL policy.
The cap rate, set by an insurance company and adjustable throughout its term, determines the maximum annual percentage by which an index can increase each year. It can also be altered periodically during its life. Participation rates (how much an index gain your money can participate in), set by insurance companies are also adjustable throughout their terms; many IUL policies offer participation rates of up to 12% but these tend to only apply to equity-indexed accounts; during periods of high volatility when options become more costly and reduce earnings potential, these may be reduced even further.
Many IULs offer floor rates – the minimum annualized interest rate that your indexed account can reach in any given year – which protects against steep losses during a downturn. Most policies feature this limit at 0%; however, others may feature lower floors depending on index and insurer.
One of the main drawbacks to IULs is that they’re often sold using unrealistic projections of future returns, which may make them appear costless in certain years or lower your premium than with other forms of life insurance. Unfortunately, this creates a false sense of security for clients who end up paying more than expected in order to keep their policy active – leading them to file lawsuits against insurance companies for deceptive marketing practices related to IUL policies.
Floors
An IUL is appealing due to its ability to allow cash value growth based on index performance; however, each policy comes equipped with caps and floors which limit how much can be earned annually – protecting it against large losses while decreasing volatility in your account. These caps and floors can be set anywhere between 0% to 100%; guaranteed for life!
Some IUL policies allow you to tie a portion of their cash value directly to an index such as S&P 500 or Nasdaq 100. Index-linked investments are subject to market caps, floors and participation rates imposed by market caps, floors or participation rates and will calculate credit interest according to historical returns of their underlying indexes.
An IUL typically offers two cash value accounts: one which increases at a set fixed interest rate declared each year by the insurer and another that can grow based on market index performance. With these two cash accounts working in tandem, an IUL could potentially produce higher returns than traditional universal life policies without this feature; both also contain floor and cap protection to limit losses and maximize gains.
No matter its protections, an IUL can still lose money, making it important for consumers to understand how these products operate before deciding whether or not to invest. Unfortunately, no regulations require insurers to disclose costs and projections for IULs; thus it is easy for mislead consumers about their value and performance; hence it is vital that any consumer considering IUL insist on year-by-year cost disclosure and performance requirements from insurers when considering investing.
Taxes
When purchasing an IUL, part of your premium goes toward funding its death benefit, while the rest is invested in its cash value account, which grows according to its underlying index performance. Some of this growth also pays for costs associated with insurance itself while its long-term growth remains tax-free.
Some IUL policies offer a floor rate, or minimum guaranteed rate that protects investments against market downturns, making IULs attractive to investors who wish to avoid risky stock markets. Furthermore, the most suitable policies allow you to allocate funds into different cash accounts according to your risk profile and some even enable investing in non-index linked bonds.
One drawback of IULs is their fees that eat into your returns. These expenses could include surrender charges, administrative fees and premium payments that differ by insurer. Furthermore, these policies can become costly if you outlive expectations; paying higher premiums than if purchasing term life policies is likely.
Indexed universal life insurance may offer greater returns than other life insurance options; however, no guarantees can be given. Therefore, before investing in IUL, it’s wise to carefully evaluate all your options and consult a financial professional before making a final decision.