There are several different types of insurance policies that provide financial relief when the policyholder passes away. However, the sheer multitude of policies available can be confusing for newcomers. In particular, indexed universal life insurance (IUL) is one of the least understood. Nevertheless, this kind of policy offers many benefits for the holder and can yield financial benefits in the long term. Learn more to determine whether this is the right policy for you.
What Is Indexed Universal Life Insurance?
A Flexible Insurance Policy
Like other life policies, IUL provides a payout when the policyholder passes away. However, IUL adds an extra variable to the equation. Instead of just paying a monthly premium, IUL includes a cash account that receives interest payments. You can make contributions directly to this cash account if you wish, or you can watch it grow as interest accumulates over time. Generally, people make large additional payments to accrue more interest.
The interest you gain is determined by the index, which is how this policy gets its name. You can choose from a number of indexes, but the most common ones track the stock market, like the NASDAQ or S&P 500. When the index shows gains, a corresponding amount goes into your account. The payment on your cash balance is calculated by multiplying the index’s performance by your balance and then adjusted using a participation rate set by the policy.
Low Risk With Solid Returns
When you opt for IUL, you don’t expose yourself to the full risk of the stock market. Your money is not literally invested into any equities, which means that even if the stock market crashes, you will not see the value of your account wither away. In months when the market drops, IULs simply do not pay any interest to your account. This means that you effectively cannot lose. How can insurance brokers offer such a deal?
In reality, your money goes into the hands of investment bankers who know how to beat the index. If the index goes up by 5%, they only have to give you 5% even if they secretly made 12% making their own trades. However, since you aren’t actually investing the money, you don’t have any of the risk. It’s a reasonable tradeoff: You won’t lose your investment, but someone else might be able to make a bit more off of it.
Tax Benefits
Aside from the lack of risk and generally above-average ROI, another benefit is that the gains on your cash value are tax deferred. You only have to treat them as income when you decide to withdraw. You can withdraw the cash value at any time.
Is IUL Right for You?
The ideal IUL policyholder is often someone on the younger side who is looking for a life policy but also wants to see their money grow. However, if you aren’t sure what kind of life policy is best for you, ask an expert. Contact Brooker Medicare to learn more about insurance policies and other ways to ensure your financial future and that of your family.