Why IUL? Pros and Cons
Indexed Universal Life (IUL) insurance is a type of permanent universal
life insurance that provides flexibility in premiums, a cash value component linked to an equity index, and a death benefit. The videos explains a specific of the IUL policy and an overview of iul. Over35andUp is not endorsing any company.
Pros:
1. Flexible Premiums and Death Benefit: IUL policies allow you to adjust premiums (within limits) and can let you increase or decrease your death benefit over time.
2. Potential for Growth: The cash value of IUL is tied to an index (like the S&P 500), so there’s potential for growth if the market performs well. Unlike direct stock investments, there’s usually a cap and floor, meaning your cash value has protection against large market losses.
3. Tax Benefits: The cash value growth is tax-deferred, and you can often borrow against the cash value tax-free.
4. Long-Term Cash Value: IULs can build cash value that you can access in retirement or emergencies, which can provide a supplemental income source.
Cons:
1. Complexity and Fees: IUL policies are often complex, with fees that can eat into cash value growth. These include mortality and administrative charges, which may increase over time.
2. Market Limits: Though linked to indexes, IULs often have caps (maximum gains) and floors (minimum returns). In a strong market, you might miss out on some potential gains due to these caps.
3. Premium Flexibility Risks: Flexibility in premiums is nice, but if you underfund the policy, it could affect the cash value growth and eventually lead to a lapse in coverage if not managed carefully.
4. Lower Returns in Low Market Conditions: If the index performs poorly over time, your cash value will grow more slowly.
Finding the Best Agent
Look for an agent with a strong reputation, a client-centered approach, and experience in IUL policies specifically. An agent with professional certifications like Chartered Life Underwriter (CLU) or Certified Financial Planner (CFP) can be helpful, as these designations indicate expertise in life insurance and financial planning. Checking reviews and testimonials can also help find a good fit.
Universal Life Insurance (UL) offers three main types, each with unique features:
1. Guaranteed Universal Life (GUL):
• Characteristics: Offers a fixed death benefit and stable premium payments over the life of the policy. Cash value growth is often minimal compared to other UL types.
• Pros: Lower premiums and reliable coverage make it a budget-friendly option.
• Cons: Limited cash value growth potential, so it’s less suited for policyholders seeking investment features.
2. Indexed Universal Life (IUL):
• Characteristics: Allows flexibility in premiums and death benefits within set limits. Cash value growth is linked to a market index (such as the S&P 500), providing potential upside in strong market conditions while protecting against significant losses due to a floor rate.
• Pros: Potential for cash value growth tied to market performance and some protection from market downturns.
• Cons: Can involve high fees, with growth caps limiting the upside. It’s also more complex and may need careful management.
3. Variable Universal Life (VUL):
• Characteristics: Provides flexibility in death benefits and premiums within certain limits, but cash value is invested in sub-accounts, similar to mutual funds. The policyholder must manage these investments actively.
• Pros: Offers greater growth potential due to direct market investments, which can suit those who want to be involved in the stock market.
• Cons: Higher risk due to market volatility. Policyholders must manage investments, which can result in losses. Typically has higher fees than GUL and requires active monitoring.
Each type of universal life insurance offers flexibility and some level of cash value growth, but they vary in risk, complexity, and premium costs. The best choice depends on your financial goals, risk tolerance, and whether you seek an investment component alongside insurance.
