Indexed Universal Life Insurance
When it comes to thinking about a life insurance policy, there are countless options. Term life and whole life are the most commonly known types of life insurance, but there’s another option: indexed universal life insurance. If you have never heard of this kind of insurance, don’t worry.
What is Indexed Universal Life Insurance?
Indexed universal life insurance is just one kind of policy you can select when planning your estate or considering what kind of life insurance best fits your family’s needs and lifestyles. It the simplest sense, indexed universal life insurance is similar to whole life insurance in that upon paying your monthly premium, coverage is yours to keep throughout your lifetime, unlike term insurance policies that end after an agreed upon number of years. However, what separates indexed universal life insurance is the additional financial resources that it offers, helping you save by building a large cash value.
These kinds of insurance plans are similar to whole life and universal life insurance plans in that they carry a death benefit — that is, a specified amount of money paid out to your beneficiaries upon your death — as well as a cash value that you can borrow against if needed. But, indexed universal life insurance policies function differently. The premium you pay each month first covers the cost of your policy and related fees, and remaining funds are put towards the cash value of your policy. What makes this so different is that the cash value you accrue flexes based off a stock market equity index (similar to an interest rate). This means that cash value of your indexed universal life insurance policy can grow at faster rates than a standard universal life or whole life policy.
Eventually, these tax-free cash values can be used to pay for your monthly premium or can be borrowed against in situations where you may need additional funds. With a successful indexed universal life insurance policy, it is possible to withdraw portions of your savings, though you will likely have to pay taxes on the withdrawn amount, plus any fees.
How Indexed Universal Policies Are Different From Universal Plans
If you have ever considered a universal life insurance policy, you probably know that they come in a variety of forms. Universal life insurance policies are permanent plans that combine low monthly premiums with the ability to build cash value based on a stock market equity index. Unlike many universal life policies, indexed universal plans allow you to allocate different cash value amounts to fixed or equity index accounts — the factors that determine how your cash value will grow and at what rates. This gives you more control over the growth of your cash value, but is often considered more risky than working with a universal life insurance policy that guarantees you a set interest rate.
Why Do Some People Choose Indexed Universal Life Insurance?
When it comes to creating a diverse estate and retirement plans, many people consider indexed universal life insurance policies. Since this kind of life insurance has the ability to grow to a generous cash value, some consider its potential earning power to be a strong part of their retirement portfolios, just like a 401(k). For this reason, many people choose indexed universal life policies with future plans of drawing from the cash value in later years. There are other reasons an indexed universal life plan may be a strong option for you:
- You are looking to diversify your personal or retirement savings in several ways
- You are not looking to use the accrued cash value for many years
- The economy is booming and can help your cash value grow quickly
- You do not already have life insurance
The Pros and Cons of Indexed Universal Life Insurance Policies
Deciding whether an indexed universal life insurance policy is right for you can be tricky. While these policies can be great at building savings and planning for the future, they do have some downsides as well. But like all universal and other life insurance plans, benefits may outweigh the risks in your particular situation.
Pro: Tax-deferred cash value growth
Indexed Universal Life policies can help you reach your savings or retirement goals because of the flexible growth rate. In addition, all of your contributions are tax-deferred, meaning you won’t pay taxes on the cash value until you withdraw it.
Con: Potentially increasing premiums
Many indexed universal life insurance policies stipulate that the cost of doing business — that is, managing your insurance policy — may increase over time. Unfortunately, this means that your monthly premium could increase in the future. If you pay the same monthly amount, this means that you could put more towards the premium cost, with less going towards the cash value. For this reason, it is important to understand what your indexed universal life policy could cost further down the road.
Pro: No contribution limit
Unlike 401(k)s and other retirement accounts, there is no limit to the amount of money you choose to put into your indexed universal life policy. This can help you grow your cash value — and thus, savings — at a faster rate.
Con: Higher risk
As the economy fluctuate, the stock market equity index that you have chosen for your policy can change as well. This could lead to large growth during economic booms, but slowed or no growth during economic stagnation. For this reason, indexed universal life insurance policies can be considered a riskier choice that universal life insurance or other savings accounts.
Pro: Combination of life insurance and savings
Estate planning can be a headache, but an indexed universal life policy can allow you to knock out two tasks with one plan. Because these policies combine savings and death benefits, you are able to plan for retirement meanwhile ensuring your family has access to funds they may need in the event that you pass.
Does an indexed universal life insurance policy seem like the right option for you? PolicyZip’s life insurance specialists can guide you through the decision and help you identify the best policy. To get started, call 844-627-7700 or fill out the form below.