What is an IUL (Indexed Universal Life Insurance)?
Indexed Universal Life Insurance (IUL) is a type of permanent life insurance that offers both a death benefit and a cash value component. It combines the flexibility of universal life insurance with the potential for growth linked to the performance of a specific market index, such as the S&P 500.
Unlike traditional universal life insurance, which typically earns interest at a fixed rate, an IUL's cash value growth is tied to the performance of a market index, but the policyholder’s money is not directly invested in the market. This means you can benefit from market gains while protecting your principal from market losses due to a built-in floor (usually 0% or 1%).
Key Benefits of an IUL
Potential for Market-Linked Growth
The cash value of an IUL is tied to the performance of a stock market index, allowing you to potentially earn more interest than a traditional whole life or universal life insurance policy.
Downside Protection
While you benefit from market gains, your cash value is protected from market losses. Even if the index performs poorly, your cash value typically will not decrease, thanks to the floor feature (usually 0% to 1%).
Flexible Premium Payments
IUL policies offer flexibility in premium payments. You can adjust your premiums and death benefit as your needs change over time, offering you greater control of your policy.
Lifetime Coverage
Like other permanent life insurance products, IUL provides coverage for your entire lifetime (as long as the policy is maintained), unlike term life insurance, which expires after a specific period.
Tax-Deferred Growth
The cash value grows tax-deferred, meaning you do not pay taxes on the gains while they accumulate, allowing the policy's cash value to grow faster over time.
Access to Cash Value
You can borrow or withdraw from the accumulated cash value of the policy (though this may reduce the death benefit and could have tax implications). This can be useful for funding retirement or other major expenses like education or healthcare.
Death Benefit for Your Beneficiaries
The policy pays out a death benefit to your beneficiaries, which can provide financial protection for your loved ones after you’re gone, often with minimal tax implications.
Potential for Dividend Participation
Some IULs offer the option to participate in dividends, which can boost the cash value over time, though this depends on the insurance provider and policy structure.
