Today, many people are looking at the value of permanent life insurance with its ability to provide long-term security along with cash value. As such, indexed universal life (IUL) has become a popular choice in providing permanent life insurance protection, and an even greater potential for growth through indexing of interest credits.
How it works
Like other types of permanent life insurance, the premium payments you make to your IUL policy have the potential to earn interest and grow the cash value of your policy. However, what makes IUL different is the way interest is credited to your policy. In addition to offering a traditional declared interest rate, IUL offers the opportunity to earn interest that is linked to the performance of a selected choice of market indexes.
When the linked index performs well, your cash value builds at a faster rate, earning you more money that can increase your cash value. In contrast, if the index doesn't do well, your cash value will accumulate at a slower rate. The amounts credited to the cash value in your IUL grow tax-deferred, and may be used to pay insurance premiums, providing the flexibility to reduce or even stop making out-of-pocket premiums payments as long as the minimum premium payment is being met.
Flexibility for greater growth
As with a regular universal life insurance policy (UL), IUL allows for a flexible premium. This means you can choose to contribute more to your policy (within federal tax law limits) in order to help you build up your cash value even faster. However, it's important to note that many IUL policies have policy caps, whereby you're allowed to earn only a maximum amount of indexed interest credits per year. This means you'll have a limit on how much you can earn even if the index does extremely well.
A guaranteed credit
Most IUL policies come with a guarantee that you will be credited a certain amount during a given time period - regardless of how the market performs. So if the index goes down in a year, your cash value won't. Granted, this could be as low as one percent (or just a guarantee of floor protection so you don't lose money), but nonetheless, it's an assurance that you won't lose your cash value due to decreases in the index. It's important to note that the account value, any policy loans or surrenders may be subject to policy charges, surrender charges, transaction fees, and may reduce the cash value and death benefits of your policy.
An IUL policy can be a good way to provide your loved ones with the protection of a permanent life insurance policy along with the potential to build your tax-deferred savings and protecting your cash value from market losses.
*As long as required premium payments are timely made.