Wondering if Indexed Universal Life Insurance might be right for you and your family? And if it is a good or a bad investment for you? This article will give you the information you need to know.
Purchasing life insurance might not be the most pleasant thing to think about. If you’re young and healthy, you may not even bother thinking about it, because you’re wondering what the point of it is.
After all, it’s an investment that you pay into to be covered in the event of your untimely passing, in order for your family to still maintain the same lifestyle with you no longer around. Doesn’t sound like a happy thought, right?
Although this may be true, life insurance can be a valuable thing. It’s important to be prepared so your surviving family is taken care of temporarily after you’re gone. It would be a shame to wait until it’s too late.
So, educating yourself on what kind of life insurance policy to buy and when to buy it is a valuable use of time. First, it’s important to know what options are available. And, what kind of options to take that are the best for you and your family.
Types of Life Insurance
The two main types of life insurance available are term life insurance and permanent life insurance. They are exactly as they sound. Term life insurance is coverage for a limited span typically ranging from 10 to 30 years.
Because of its limited run, these plans are generally more affordable than permanent plans. If you unfortunately pass away in the window of coverage, your beneficiaries will receive the policy payout.
Permanent life insurance is a more costly option, but as its name suggests, this span of coverage never expires as long as you’re alive and paying the premium. There are many types of life insurance that fit under the umbrella of permanent life insurance.
Whole life insurance helps you build cash value that can be used for a number of things. It’s similar to a retirement account in that you can withdraw funds or borrow against it if need be. You’re also be able to earn dividends that will help increase the value of your account.
What is Indexed Universal Life Insurance?
Indexed universal life insurance is another type of permanent life insurance. This one is more flexible in terms of options available to you with how you want to grow the account.
IUL does not have a fixed rate of return but is rather tied to a market index. So this is similar to as if you were investing in the S&P 500. Except, the money that you make is linked directly to life insurance benefits and a cash value account.
What Are The Benefits of Indexed Universal Life Insurance and Is It a Good or Bad Investment?
The greatest benefit right off the bat is that prices can be lower than other permanent life insurance policies. However, it will be more expensive than term. But, if you’re looking for something permanent, an IUL policy can be attractive.
These can be less expensive than other policies because there is some risk. However, there’s typically a guaranteed rate of return associated with an IUL policy if your investment’s within aren’t performing well.
Think of it as investing minus the risk of completely losing your money. Moreover, there are flexibility benefits when it comes to purchasing an Indexed Universal Life Insurance policy.
You have the autonomy to control the amount that is risked in any indexed accounts. If you’re looking for something that has lower risk, an IUL policy could make sense.
Not only that, you may be able to make large contributions to your IUL policy. Unlike other options where you contribute a fixed amount, an IUL policy may allow you to put more money away.
On top of that, the cash value can be used to pay the premiums. This means that you can control the amount of out of pocket payments that you pay towards those premiums. In addition to this, because an Indexed Universal Life Insurance policy is a type of universal plan, the amount that needs to be paid each month is not a fixed payment.
No Minimum Age
Another benefit from this plan is the fact that there is no minimum age in which you have to wait until you can use your money. Most other plans require you to wait until age 60 to access your funds.
In the event of an emergency, you can withdraw money without having any obligation to pay it back. Although taxes may apply. There also may not be any penalties set if you do need to use money from your IUL policy.
You can kind of think of it as another bank account. Of course, try not to use it as your personal piggy bank. Especially if it was specifically earmarked for something else, like retirement.
What are the Downsides to an Indexed Universal Life Insurance Policy?
Long Term Investment
Indexed Universal Life Insurance is not a short term investment, which can be a good or bad investment. This plan should not be purchased by those who don’t foresee themselves using the plan for the rest of their lives.
Some people don’t plan on having life insurance forever. Once you pay off all debts, have less dependents or reach a point where you can be self insured, indexed universal life insurance might not be as attractive.
According to Smart Asset, “An IUL policy is a long term vehicle. When saving money in an IUL policy, you shouldn’t plan on taking any income from it for at least 10 years or longer.”
IUL policies are typically best for those that have a higher net worth or have a substantial income. Anyone who doesn’t fit these two criteria or don’t already come from a place of considerable wealth might not reap the benefits that an IUL policy provides. The cost can be too high for a potential return that is too low.
Also, something else to consider is that IUL policies may not have any guarantees. Unlike whole life policies that have fixed rates you can count on, an IUL policy does not. You might just be at the mercy of the market indexes that you’re invested in.
Another thing to consider is that although your contributions may be unlimited, your earnings are not. Earnings on IUL policies are capped.
For example, if the S&P 500 earns 12% and your particular policy is capped at 6%, you will only see the 6% return. Even with a spectacular year in the market, you may not be able to share in all of the upside.
In that same fashion, if the market goes down, you should be protected. However, even though you are secured from losing money, there are still fees and expenses that will be taken out. Unlike other investment vehicles that aim to outperform an index, IUL policies cannot outperform the index and typically don’t participate in the dividends of the index either.
It was noted earlier that you have the autonomy to choose how much to pay out of pocket every month. This is a benefit that only works best for particularly high earners. There are still minimums to maintain your policy stays in force. If you don’t meet these minimums, then your policy could lapse.
Smart Asset writes that “If someone has no need for life insurance, then another vehicle may be more appropriate for them. That might mean just saving in a 401(k) or IRA. You won’t have a cap on returns when the market has a great year.”
So, if you’re looking purely to grow investments and you’re not already maxing out these other options, then an IUL policy may not be your best bet.
Conclusion on Indexed Universal Life Insurance Policies
If you’re looking to invest in the market while wanting to avoid high risk investments, an Indexed Universal Life Insurance policy could just make sense for you, and make a good investment. While you may not get all of the upside of the market, you do get some downside protection along with some pretty good tax benefits.
However, as we mentioned before, if you aren’t a high income earner, there are probably better options for you to consider when it comes to life insurance, such as term. IUL policies are better suited for those who have more money to work with as they’re already maxing out their other options. And, they want a place to stash money that can offer them the potential for a good rate of return along with some nice tax benefits.
Of course, no two people and certainly no two families are alike. Taking the initiative to invest time in planning for your future can give you tremendous peace of mind.
The Bottom Line
Reading more and learning more about all the avenues to take when it comes to coverage is the best thing you can do while you’re still around and still healthy. Life insurance isn’t just for those entering their golden years, and it certainly doesn’t have to be a grim conversation.
It can be for those who just got married or are planning on raising children, which are definitely two joyous occasions that happen earlier in life. Indexed Universal Life Insurance can make a good investment for some families and a bad investment for others.
Protecting your loved ones even in the event of your passing is a loving act. Start having discussions with your family and a professional, who knows about these types of policies, to see if an indexed universal life insurance policy might just make sense for you.