Much has been said about Indexed Universal Life and its impact and growth over the last several years in the life insurance industry.Through the first three quarters of 2018, it represented 24% of overall individual life sales and 65% of total universal life sales*. Many industry experts have weighed in on the product mechanics, costs, benefits and features, and although these are very important, this paper sets out to examine a few of the common uses of a maximum-funded Indexed Universal Life (IUL) policy, while also offering some caution in certain circ*mstances where IUL may not be the most appropriate product choice in the array of financial product options.
First, let’s define what a “maximum-funded” IUL is.IUL is a permanent life insurance policy that builds cash value by crediting interest based on some external index strategy.Because it is a permanent UL policy, there are an infinite amount of ways to fund such a policy.That is, as defined by the insurance company, a client could pay a minimum premium to simply cover policy expenses and prevent the policy from lapsing from year to year, or she could pay a “maximum” premium as allowed by the IRS to take advantage of the favorable tax treatment of permanent life insurance, or anywhere in between.For purposes of this paper, we’ll examine the max-funded scenario.
Income Replacement
Income replacement is one of the primary reasons that clients purchase life insurance. Further, there are two core elements of any life insurance policy, including IUL, that make it attractive from an income replacement standpoint – leverage and tax-efficiency.Using an oversimplified example, if a client pays $1 and can leverage it to $100 in the event of a premature death, AND that $100 can be paid income tax-free to the beneficiary, this can be a good deal from a financial standpoint.The $100 can be used to replace the income lost because of the premature death.
Where IUL might not be the best fit as a solution for income replacement is in the instance where a client wants to protect his family with life insurance and might not have the current ability to pay for a max-funded IUL policy.To properly fund the IUL, it might require an outlay of $4 to create $100 of benefit, but for a term policy the outlay might be $1.So, if the client is on a tight budget, you might see strong consideration for the term policy instead of the IUL.In either case, there is still significant leverage and tax benefit.
Retirement Income Supplement
Most financial experts will agree that a predictable stream of sufficient income is vital to the success of a client’s finances in retirement.While growth and accumulation are important during your working years, creating income you can’t outlive becomes more important during your retirement years.IUL can be a useful product and play an important role in retirement.During your working years, your IUL’s cash values have grown and accumulated, and now in retirement you may be able to take income tax-free distributions from this policy to supplement your other sources of retirement income.It is important, however, to consistently monitor the IUL to ensure that it has enough value to continue to support the income being distributed to the client.One idea might be to use this retirement supplement IUL policy as a “backstop” in case your other retirement accounts don’t perform as intended, or if you are looking to reduce your income tax situation in a particular year.IUL offers flexibility to take income from the policy on an “as-needed” basis and doesn’t require you to take a consistent, static amount each month or year.
Because of an IUL’s ability to produce income tax-free distributions, it might be easy for a client to consider the thought of, “Well, why don’t I put all my money in this IUL?”Though tempting, it is generally not sound advice to suggest a client put all of their eggs in one basket.There are other financial products that exist that can be layered in with IUL to create tax-efficiency and even guarantees for the client.The scope of this paper won’t cover these other products, however.
Life Insurance for the Living
Up to this point, we’ve covered two of the most common uses for IUL – income replacement and supplemental retirement income.Another aspect of most IUL policies that demonstrates how useful IULs can be are the living benefit riders or provisions that exist.These give the client the ability to use part or all of the policy death benefit for purposes of chronic, critical or terminal illness.Since IUL is still a life insurance policy first, these benefits aren’t typically the primary driver of a purchase, however, they give the IUL additional flexibility and provide the client with more options to actually use the policy during her lifetime.
The chronic illness benefit, in particular, has become a popular “living” benefit in the industry.This is no surprise since the cost of long-term care continues to increase and the options for insuring against this cost have become limited in the traditional long-term care insurance space. However, buying an IUL solely for the purpose of mitigating long-term care or chronic illness risk, or thinking that an IUL is the only financial product that a client needs in order to handle this risk, would be a misstep.Certainly, IUL can provide a chronic illness benefit, however, it is generally recommended to consider alternative products as part of an overall strategy to cover the long-term care risk – not just IUL.
Other Potential Uses for Max-Funded IUL
Income Replacement
Retirement Income Supplement
Living Benefits
Estate Planning / Wealth Transfer
College Planning
Business Planning
Premium Finance
If a financial product existed that could provide a leveraged benefit and income tax efficiency in the event of premature death, chronic illness, heart attack, cancer, stroke, terminal illness and could provide income diversification to supplement a retirement plan, perhaps it could be part of a client’s plan both during their working years and through their retirement years as well.Maximum-Funded IUL may fit the description of this dynamic product, and it may be very useful when positioned properly.It’s not the only tool an advisor should have in his bag and it’s not always the answer, but it may certainly have its place in certain client situations.
* – https://www.limra.com/Posts/PR/News_Releases/LIMRA__Total_Individual_Life_Insurance_New_Premium_Increases_in_the_Third_Quarter_2018.aspx
Disclosure
The content within this document is for informational and educational purposes only and does not constitute legal, tax or investment advice. Customers should consult a legal or tax professional regarding their own situation. This document is not an offer to purchase, sell, replace, or exchange any product. Insurance products and any related guarantees are backed by the claims paying ability of an insurance company. Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results. Some types of permanent insurance may require consistent premium payments, or the policy may risk lapsing. Unpaid policy loans decrease future death benefits paid to beneficiaries. Excessive policy loans may cause the need for future premium payments. If a contract lapses due to excessive policy loans or if a customer chose to surrender their policy, one may be subject to tax payments for policy loans that exceeds the premiums paid. Excessive premium payments may cause the policy to become a modified endowment contract. Policies classified as modified endowment contracts may be subject to tax when a loan or withdrawal is made.
FAQs
There is no contribution limit on an IUL policy, unlike an IRA or 401(k). You can put as much as you'd like into the contract and the amount will grow. So, by overfunding your IUL policy, you can accumulate a cash value that is tied market performance, but not directly exposed to market forces.
What is a maximum funded IUL? ›
There is no contribution limit on an IUL policy, unlike an IRA or 401(k). You can put as much as you'd like into the contract and the amount will grow. So, by overfunding your IUL policy, you can accumulate a cash value that is tied market performance, but not directly exposed to market forces.
What does Max funded life insurance mean? ›
A properly-designed, max-funded policy should have about 85% Cash Value to Premium. So any time that the cash value to premium ratio is not 85%, the policy includes more death benefit protection than the absolute minimum required.
What does an IUL invest in? ›
Indexed universal life (IUL) insurance is a form of permanent life insurance that offers a cash value component along with a death benefit. The money in the cash value account can earn interest through tracking an equity index selected by the insurer, and can also usually be partially allocated to a fixed-rate account.
What are the benefits of IUL vs 401k? ›
IULs offer a death benefit, while 401(k)s do not. IUL policies come with an additional cash value that can be borrowed against if you need the money for other expenses. 401(k)s offer more investment options than IULs, and employers often match a portion of employee contributions.
Can you borrow from an IUL? ›
After enough cash has accumulated, a policyholder can borrow from their IUL, although they can expect to pay interest on the loan. If they don't pay it back in full, the amount owed will be deducted from their death benefit.
When can I take money out of my IUL? ›
No Minimum Withdrawal Age Requirements
Again, unlike retirement plans such as IRAs or 401(k)s, IULs don't require you to reach a certain age before withdrawing funds.
What is the 7 pay rule for IUL? ›
The 7-pay premium limit is a level annual amount of money that can be put into a cash value life insurance policy during each of the first seven policy years (or the first seven years after a material change in the policy, e.g. an increase in the face amount).
How does an IUL build cash value? ›
IUL policies allow you to grow your cash value by putting a portion toward an equity index account like the S&P 500 or NASDAQ. Rather than only relying on non-equity earned rates, an equity index account grows based on the index of an entire market or market sector.
What is the disadvantage of Max Life Insurance? ›
Disadvantages of Max Life Insurance:
If you die, your beneficiaries will receive a lump-sum payment instead of getting lifelong income like with other types of life insurance plans.
Indexed universal life insurance policies provide greater upside potential, flexibility, and tax-free gains. This type of life insurance offers permanent coverage as long as premiums are paid. Some of the drawbacks include caps on returns and no guarantees as to the premium amounts or market returns.
Can you sell your IUL? ›
Universal life insurance is a popular form of permanent life insurance. It can accumulate cash value over time and also provide a death benefit to your beneficiaries. However, if your universal life insurance policy no longer serves its intended purpose, you may be able to sell it for cash through a life settlement.
How much can you put into an IUL every year? ›
The guide by IAMS provides an example of how the annual premium limit works. For a policyholder who is 35 years old and in good health, the annual premium limit might be around $40,000. This means that the policyholder can contribute up to $40,000 to their IUL policy each year.
How much does a million dollar IUL cost? ›
The cost of a $1 million life insurance policy for a 10-year term is $32.05 per month on average. If you prefer a 20-year plan, you'll pay an average monthly premium of $46.65.
Do you pay taxes on IUL withdrawals? ›
Tax-free growth and distributions: “IUL distributions are tax-free versus tax-deferred in the other vehicles,” says Chris Abrams, an IUL expert at Abrams Insurance Solutions. That means you don't have to pay taxes on the money you eventually draw from the cash value of the IUL.
Why is an IUL better than a Roth? ›
IULs have fixed premium costs, have an investing elemen and pay a tax-free lump sum to your beneficiaries. On the other hand, Roth IRAs have unlimited growth (and loss) potential and require no commitment for a specific contribution size or frequency. They also provide tax-free income in retirement.
Is an IUL a cash value life insurance? ›
Indexed universal life insurance is a type of permanent life insurance, which means it has a cash value component in addition to a death benefit. The money in your cash value account can earn interest based on a stock market index chosen by your insurer, such as the S&P 500 or the Nasdaq Composite.
How much money can I borrow against my life insurance? ›
Loan limits: The limit for borrowing money from life insurance is set by the insurer, and it's typically no more than 90% of the policy's cash value. If you need more than that amount, you may need to consider other loan types.
What is the average IUL commission? ›
Street level IUL commissions are usually in the range of 75%-90% depending on the company. You can expect to receive this commission level from nearly any IUL FMO or BGA. Some carriers offer bonus amounts above street level up to 20% once you hit a certain production milestone.
What are the 2 main charges deducted monthly from a universal life policy? ›
Your monthly fee gets split into two parts: One part pays for life insurance coverage, and the other part (aka the cash value) goes into a savings and investment account.
Yes. Lawful beneficiaries have right to proceeds as against creditors of policyowner / insured unless beneficiary is insured or insured's estate.
How do rich people use cash value life insurance? ›
High-earners and wealthy people can use life insurance to pay estate taxes on a large inheritance. Cash value life insurance offers an alternative tax-deferred investment account if you've maxed out traditional accounts. Life insurance trusts can be used alongside permanent life insurance to maximize your assets.
Is Max Life a good investment? ›
Max Life is one of the companies with the highest claim settlement ratio for the FY 2021-22 with a CSR of 99.34%. This means that the company has a better chance of settling your family's claims in case of your unfortunate death.
What life insurance never goes up? ›
Whole life insurance policy benefits
Your premiums are fixed and will never go up, regardless of market conditions. You may be able to withdraw funds or take out a loan. Your death benefit is guaranteed as long as you make the required premium payments.
Is Max Life Insurance worth it? ›
Max life insurance is one of the best insurance company. I took traditional insurance policy plan which provide me best service and good returns. The premiums are low and the policy coverage is 81% with high claims. The behaviour is good from executives and staff members.
Why do people buy universal life? ›
Like whole life, a universal policy can provide lifetime protection while building cash value with tax advantages. UL also gives you the flexibility to raise or lower premiums within certain limits, so it can cost less than whole coverage.
What does Suze Orman say about universal life insurance? ›
Suze Orman isn't a fan of whole life insurance, and especially not as an investment. Investment portfolios for whole life policies usually have expensive fees and are overly conservative. Keep your investments and insurance separate, and stick to term life insurance instead of whole life.
What are the 4 types of universal life insurance? ›
There are several different types of universal life insurance to choose from, including non-guaranteed universal life, guaranteed universal life, indexed universal life and variable universal life. The best type of coverage for you will vary depending on your financial goals and needs.
Is indexed universal life better than whole life? ›
Whole life insurance provides the stability of a fixed premium, and it's generally more affordable than indexed universal life insurance. On the other hand, IUL offers the flexibility of adjusting your premium and even skipping payments as your cash value amount allows.
Can you roll a 401k into an IUL? ›
Technically, you can't roll over your 401(k) account into an insurance policy; however, if you have a life insurance needs, you can withdraw funds from the account and redirect them to pay for a life insurance policy.
A fixed indexed annuity is a tax-deferred, long-term savings option that provides principal protection in a down market and opportunity for growth. It gives you more growth potential than a fixed annuity along with less risk and less potential return than a variable annuity.
What advantage does an equity indexed life insurance policy have over a variable life policy? ›
Key Takeaways. With an equity-indexed life policy, the cash value rises with gains in the relevant market index. If the market drops, the cash value does not drop with it—the cash value simply won't rise. This type of policy tends to have lower premiums than other forms of whole life insurance.
What is an indexed benefit? ›
Indexing earnings allow the Social Security Administration to award benefits that account for changes in standard of living. If earnings were not indexed in this manner, then retirees would receive much lower benefits that would be out of proportion to the true buying power of their earnings in prior years.
What is a major difference with IUL policies when compared to other permanent products? ›
Whole life insurance provides the stability of a fixed premium, and it's generally more affordable than indexed universal life insurance. On the other hand, IUL offers the flexibility of adjusting your premium and even skipping payments as your cash value amount allows.
What are the pro and cons of indexed annuities? ›
Fixed Index Annuity Pros and Cons
| Pros | Cons |
|---|
| Tax-Deferred Growth | Long-Term Contracts |
| Principal Protection From Stock Market Crash | Limited Upside Potential |
| Earn Interest Based On Stock Market Performance | Complicated Index Strategies |
| Lock-In All Interest Earned (Never Lose Money) | Surrender Charges |
6 more rowsIn conclusion, a deferred fixed indexed annuity is a type of investment that Suze Orman recommends for securing retirement income. It provides a guaranteed minimum interest rate and protection against market downturns. However, it has some drawbacks, such as high fees and a surrender period.
What is the downside of indexed annuities? ›
The Cons of Indexed Annuities
This means that the potential for any really large gains is muted. This is a classic investing risk-reward paradigm. The risk with indexing is lower than with other investments, but as a result the potential returns are lower. Indexed annuities also often have high sales commissions.
When can you withdraw from an IUL? ›
No Minimum Withdrawal Age Requirements
Again, unlike retirement plans such as IRAs or 401(k)s, IULs don't require you to reach a certain age before withdrawing funds.
What are the pros and cons of indexed universal life insurance? ›
Indexed universal life insurance policies provide greater upside potential, flexibility, and tax-free gains. This type of life insurance offers permanent coverage as long as premiums are paid. Some of the drawbacks include caps on returns and no guarantees as to the premium amounts or market returns.
How do I get the $16728 Social Security bonus? ›
To acquire the full amount, you need to maximize your working life and begin collecting your check until age 70. Another way to maximize your check is by asking for a raise every two or three years. Moving companies throughout your career is another way to prove your worth, and generate more money.
The average Social Security benefit amount for a retired beneficiary at age 65 was $1,389 per month in December 2021, according to the most recent data available from the Social Security Administration. Social Security Administration. Annual Statistical Supplement, Table 5.
What happens to cash value in universal life policy at death? ›
What happens to cash value in a universal life policy at death? Cash value in life insurance is really meant to be used during your life. Once you pass away, any cash value generally reverts back to the life insurance company. Your beneficiaries get the death benefit, not the death benefit plus cash value.
Which is better universal life or whole life? ›
universal life insurance. Whole life and universal life insurance have many similarities, and both are great options to help protect your family. The main difference is that whole life usually doesn't change—many features are guaranteed for life—while universal life offers flexibility.
