Last Updated: September 2020
Are you considering an indexed universal life insurance policy? If so, be sure you understand exactly how this type of policy works.
We’ve helped hundreds of people purchase indexed universal life insurance (IUL). People often make mistakes with this type of policy so work with an experienced life insurance expert before purchasing an IUL policy.
In this article, we will answer questions about indexed universal life insurance, offer four tips for safe cash accumulation, alternatives to indexed universal life insurance, and more.
- Indexed Universal Life Insurance Policies are Hyped by Financial Advisors
- Indexed Universal Life Insurance Often has High Fees
- 4 Tips for Safe Cash Accumulation with IUL Policies
- The Best Alternatives to Indexed Universal Life Insurance
- Work with an Independent Agent to Structure Your Life Insurance Policy
Indexed Universal Life Insurance Policies are Hyped by Financial Advisors
Financial advisors and insurance agents have been trumpeting indexed universal life insurance’s “no downside” in a bad market for years. These advisors often refer to 2008 and claim none of their clients lost any money.
In other words, they are promoting that there will be no policy losses in a down market, ever. You might also hear financial planners and insurance agents market indexed universal life as a “401k alternative” or “the ultimate tax-free retirement savings”.
Be careful with this hype.
Because there are so many questions and confusion surrounding indexed universal life insurance policies, we are going to try and clear that up. It’s vital that you make the right choice.
Indexed Universal Life Insurance Often has High Fees
Let me paint you a realistic picture of indexed universal life insurance, also known as “Equity Indexed Universal Life Insurance”.
The fees involved are rarely mentioned. Such as:
- Cost of Insurance
- Premium Loads
- Admin Fees
Depending on the policy, these expenses could be at least 2-3% or more. Even if there was a down market year and your policy remained flat, you might lose money because of the fees and expenses of your policy.
However, there are indexed universal life policies that have floor rate guarantees to pay part or all of the policy expenses in a down year. This is something we recommend you have on your indexed universal life policy and not every company offers this, so be careful.
4 Tips for Safe Cash Accumulation with IUL Policies
It’s safe to assume that if you’re looking at an indexed universal life insurance policy, you’re interested in safe cash accumulation. Here are some tips in structuring your policy for cash accumulation:
Tip #1: Buy a Policy with a Low Death Benefit to Maximize Tax-Free Income
Figure out how much you can safely commit each month, quarter, or year, and obtain the lowest non-MEC death benefit.
In other words, stuff this policy full of cash for the lowest amount of insurance possible. If you go over the MEC limit, there will be tax consequences. Structuring a policy this way minimizes expenses and loads and maximizes tax-free income.
Tip #2: Purchase the IUL Policy for a Female
Females live longer and therefore are less expensive than males. If you are doing this for purely cash accumulation and tax-free withdrawals at retirement, you’ll have a lower cost of insurance if this policy was taken out on a female.
So men, if you’re reading this, think about taking the policy out on your spouse instead of yourself.
Tip #3: Review the Loan Provisions
While accumulation is very important, don’t forget you can access your cash value at any time in emergency situations or whenever you need it. It’s very easy to take a loan against your policy, but it can also be very expensive.
If you plan on accessing the cash before retirement, make sure the loan provisions are satisfactory. Poor loan provisions could make a policy with more money payout less than a policy with less money.
Tip #4: Consider Whole Life Insurance
Consider whole life insurance as well. Indexed universal life is a complicated product that needs to be structured correctly in order to work the way it’s promoted.
Whole life insurance works the same way and has more guarantees than indexed universal life. Have your agent or financial advisor run through illustrations of both. Many financial advisors and agents recommend indexed universal life insurance too often while forgetting there are better alternatives in some situations.
Indexed universal life can be a great financial tool. Make sure you work with a reputable and experienced agent or financial advisor. They are ultimately the one’s recommending the policy and structuring it for you.
The Best Alternatives to Indexed Universal Life Insurance
Indexed universal life insurance can be extremely beneficial if it’s done correctly, but other types of life insurance policies can be better, depending on your situation. Here are a few alternatives to consider.
Purchase Term Life Insurance & Invest the Difference
An indexed universal life insurance policy is going to cost you more than a traditional term life policy.
Instead of going through the hassle of these complicated indexed plans, apply for a term policy, enjoy those savings, and invest the difference instead.
In just about every case, term life insurance is going to be the most affordable option for insurance coverage. Instead of trying to navigate the murky waters of indexed universal policies, go with the simpler option of taking the leftover money that you won’t pay in fees and invest that through traditional means.
Whole Life Insurance is a Simpler Option
As we mentioned early, another excellent option is whole life insurance. You’ll get a lot of the same benefits without confusion or risks. Whole life insurance will protect your family while also accumulating a cash-value component that you can borrow against in case of an emergency.
Work with an Independent Agent to Structure Your Life Insurance Policy
There are hundreds of different companies that you can purchase life insurance from. You could spend days researching different companies and calling agents to receive quotes. Your time is valuable, don’t waste it talking on the phone to all of those companies.
Instead, let us bring all of the lowest quotes to use. Use the quote form and we will give you the quotes from all of the best life insurance companies.
Don’t hesitate to contact us with any questions about indexed universal life insurance.