Universal Index Life Income Tax Advantaged Plan
Index universal life, or IUL, insurance is a type of permanent life insurance policy that provides both a death benefit and the ability for the policy holder to build up cash value. What makes this product different from other plans is the way in which interest is credited to the account. For example, with IUL, policy holders are given a guaranteed fixed rate of interest AND interest that is based in part on one or more market indexes such as the S&P 500.
Although there is a cap on the rate of interest that is credited to the funds in the account, there is also a minimum “floor” of 0% below which interest cannot fall. Therefore, principal is essentially protected against any downside market risk.
Because of this, IUL can essentially be a win-win product in that it can provide the opportunity for greater cash value build up than a regular universal life insurance policy, yet has less risk than a variable universal life plan.
Other advantages that many index universal life insurance policies offer may also include:
- Permanent death benefit protection
- Potential for upside growth in cash value, along with downside risk protection
- Ability to either increase or decrease premiums
- Access to cash via withdrawals and/or policy loans
How is interest credited on an index universal life policy?
The interest on an index universal life policy is credited in the following manner. First, when a policy holder makes a premium payment, he or she is typically allowed to determine how much they would like to place into the fixed portion of their account and into the indexed portion of their account.
While the interest in the fixed account is guaranteed at a certain rate, the credited interest in the indexed account will be subject to both a maximum cap and a minimum floor. In addition, once credited, gains are locked in, protecting the policy holder’s account from future market downside performance.
The cap is the maximum amount of interest that will be credited to the indexed portion of the account. In most cases, each index segment will have its own cap rate which is declared on an investment date and is guaranteed to never be less than a stated percentage.
The floor is the minimum amount of interest that can be credited to an index portion. The policy holder will be guaranteed that the interest that is allocated to an index account each year will not be below a certain minimum floor percentage.
Once the interest has been credited to the index account, the policy holder is guaranteed never to lose it – even if the underlying index being tracked performs negatively in the future.
Why purchase an index universal life insurance policy?
There are a number of reasons why individuals should consider purchasing index universal life insurance. These include:
- Flexibility in the plans provides the policy owner with an affordable tax-advantaged death benefit to protect loved ones, while at the same time providing access to the policy’s accumulated cash for various needs.
- Cash in the policy has the ability to grow at a much faster rate than a comparable fixed universal life insurance policy because – along with providing a guaranteed minimum interest rate – the interest is also tied to the upside changes in an underlying index, yet at the same time it is also protected from market downturns.