Indexed universal life insurance is a type of permanent life insurance that offers benefits to policyholders while they’re still alive. Here is what you need to know!
Traditionally, life insurance has been one of those assets someone might hold but hope they never have to use. Often designed to protect from the worst-case scenario, it’s most known for the death benefit it can offer heirs in the event of untimely death, granting a payment to beneficiaries if their provider passes unexpectedly. These are known as “term” life insurance policies. Modern life insurance options, however, can come with different features depending on the type of policy you purchase. Because September is Life Insurance Awareness Month, we thought it would be the perfect time to go over one of those options called indexed universal life (IUL) insurance.
NOTE: When reading this information, it’s important to remember that life insurance may require medical underwriting and sometimes policies can be denied. In general, the younger and healthier you are, the lower the cost of insurance.
- The Classic Death Benefit
Indexed universal life insurance still comes with the death benefit, which is typically paid out to the policy’s beneficiaries tax-free and without forcing them to go to probate courts, which are expensive and make decisions without understanding the goals of someone who has passed. The death benefit can give your heirs a nice sum of money to cover things like burial and funeral costs, outstanding debt, and living expenses. It can be difficult to lose a provider, and a life insurance death benefit can ease some of that burden.
- Permanent Coverage
IUL policies offer permanent coverage, so they can be viable for all ages. Unlike term life insurance, where the death benefit expires when the policy expires—typically in 20 or 30 years—an indexed universal life policy is a permanent policy that offers your beneficiaries a death benefit as long as premiums are paid and the policy is in force. While term policies can offer relatively affordable premiums for young, healthy policyholders, an IUL can lock in and guarantee coverage even if the policyholder develops a condition that would make them unable to obtain a life insurance policy later.
Increasingly popular [1], indexed life policies are sometimes purchased by healthy seniors as a way to transfer tax-advantaged wealth as part of their estate plan, or seniors may elect to purchase a policy that has benefits for long-term care built in to the terms of the policy or as an optional rider.
- Flexible Premiums
IUL policies allow policyholders to determine the monthly premiums they pay based on their desired death benefit and/or cash value in the policy. For instance, if your need for a high death benefit is not as great as it once was, you can pay lower premiums while still keeping your policy in force. Furthermore, the cash value portion of the policy, which is often used to save money, can also be accessed to pay premiums, whether that’s by choice or because the policyholder can’t afford the monthly premiums. On the other hand, policyholders with the funds to increase premiums to increase coverage can do so, potentially meaning a greater death benefit and a greater cash value.
- Accessible Cash Value Portion
Permanent life insurance policies like whole life and universal life offer a cash value portion that is funded by the policy’s premiums. It is often used to save money and potentially experience growth. Because the policy’s premiums are paid with after-tax dollars, that cash value is accessible to the policyholder for any reason as a tax-free loan, potentially making IUL a useful source of income for retirement, college education, a downpayment for a home, or any other major expense. Granted, as you might expect from a loan, borrowing from the cash value of a policy does accrue interest per policy terms; however, the cash value in an indexed universal policy also continues to be credited interest as if the borrowed amount is still there, again based on the contract terms. That gives the cash value a chance to keep pace with, or even outpace, the amount the policyholder owes in interest on borrowed money. Furthermore, if the policyholder uses the cash value as a tax-free source of retirement income and never pays it back, the borrowed amount plus interest is simply taken from the death benefit. It’s important to read and follow the contract terms carefully to make sure that the policy stays in force whenever the cash value is borrowed from.
- Guarantees Provided by Carrier
In addition to being accessible as a source of tax-free income, the cash value in an indexed universal policy also comes with guaranteed protection and the potential of growth that correlates with a stock market index, such as the S&P 500. Those guarantees are made by the claims-paying ability of the issuing insurance company, and they can allow you to participate in at least a portion of the market’s upside without subjecting you to the bottomless floor you might face in the market. This can make indexed universal life a helpful tool for those without the stomach or tolerance for market risk. Depending on investment, saving and lifestyle goals, it can also help to diversify a portfolio with a asset class that is not directly investing in the market but still offers potential market upside.
- Long-Term Care Hybrid Policies
Nearly 70% of today’s 65-year-olds will need some type of long-term care (LTC), and 20% will need it for longer than five years [2]. It’s also important to know that extended stays in long-term care facilities and nursing homes are not covered by Medicare, as they are considered lifestyle expenses as opposed to medical expenses. That means that today’s retirees may want to consider the possibility of needing LTC, as well as a way to cover the potentially extremely expensive costs. Modern hybrid policies can give policyholders the option to combine their life coverage with long-term care coverage, eliminating the “use-it-or-lose-it” aspect of long-term care policies of old that would cause policyholders to lose all the money they put into their policy if they didn’t use it. With a hybrid policy, if you need the benefit to pay for long-term care, it can be used to pay for those expenses, but if you don’t, it can be converted to a death benefit for your beneficiaries.
If you’d like to find out if an indexed universal life insurance policy might align with your unique financial circumstances and goals, or to schedule an appointment with Terri Lewis at Prime Capital Investment Advisors, please contact us at 913-491-6226.
Sources:
- https://insurancenewsnet.com/innarticle/indexed-life-sales-up-28-drives-strong-q2-for-life-insurance-wink-says
- https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
This article is not to be construed as financial advice. It is provided for informational purposes only and it should not be relied upon. It is recommended that you check with your financial advisor, tax professional and legal professionals when making any investment or any change to your retirement plan. Your investments, insurance and savings vehicles should match your risk tolerance and be suitable as well as what’s best for your personal financial situation.
