What If The Market Has A Series Of Bad Years
If the stock market is down many years in a row, that is all the more reason to have an IUL in your portfolio.This is a worst-case scenario for the first few years you hold the policy. You are paying to build the cash value and its sitting right around the growth floor.
However, what is the alternative? If your money is in the market, without the floor of 0%, youll be losing much more than just the cost of insurance. Youll lose your principal. When you lose principal, you have to gain a lot more to get back to where you started.
The following chart shows what interest rate you need to earn to get back to even after a loss.
|Starting Account Balance|
Remember that its better to protect your downside than take the risk of hitting a home run.
An IUL will protect your downside. So what happens if we have many bad years in a row? Its bound to happen with the volatility of the market. If we look back at the last 20 years of the S & P, there was a period when the market was down 3 years in a row .
Over the last 20 years , the actual return of the S& P was 4.02 percent. The return of the IUL with a floor of 0% and cap of 12% was 6.48%.
As you can see, you would have been better off with a cap and floor than getting all of the upside and downside of the market. None of us know what the future holds. What if your policy was illustrated at 6% and you earn 5% over the next 20 years? Then your income will be a little lower.
An Example Of How Iul Can Work For Retirement
If youre looking for more control over your financial future and a great way to supplement your retirement or other savings goals indexed universal life insurance is an excellent option.
Heres an example of how it might work for a 35-year-old man, who wants to retire at age 70. Now, that may not be you. And its important to know that indexed universal life has a lot to offer people in their 40s, 50s and other ages as well as people who want to retire early. We can craft a solution that fits your specific situation.
Now, suppose this 35-year-old man needs life insurance to protect his family and a way to supplement his retirement income.
He buys an IUL policy with a death benefit of $400,000. And he plans to contribute $6,000 annually until he reaches age 70.
Over the next 35 years, he contributes $210,000 in premiums. And assuming 6.69 percent annual interest, by age 70 hell have:
- More than a million dollars in life insurance protection
- And the policys cash accumulation value will grow to more than $631,000
At age 71, he could start taking $50,000 a year in supplemental retirement income through age 100. And as quickly as five years later, its possible hell have withdrawn more money in loans than he paid in premiums over 35 years.
In fact, throughout all of the accumulation and disbursement years, hell get:
- $400,000 or more of protection for his heirs
- And the opportunity to take tax-free income through policy loans and withdrawals
Potential Cons Of Indexed Universal Life Insurance
Having said that, indexed universal life insurance may also come with disadvantages, including:
- Indexed universal life policies can be more complex than other life policies.
- Premiums for an IUL policy will be higher than for whole life and term life policies.
- If costs of insurance arent covered, the policy will end.
- Caps and participation rates can limit the growth potential of cash value amounts.
- Cash value growth doesnt include dividends.
- In periods where low or no interest is credited, policy costs can mean net losses for that period.
- A policy lapse could leave trigger a substantial tax obligation.
- Costs of insurance are likely to go up with aging.
- Outstanding policy loans come with interest, and if the policyholder dies, the outstanding loans are taken from the death benefit.
- Smaller face values in an IUL policy dont necessarily offer more benefit than in a traditional UL policy.
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Whats A Guaranteed Floor
Index changes can be positive or negative. However, with the FFIUL, customers have the security of knowing they will never be credited less than the guaranteed minimum interest rate, or “floor.” The floor can protect cash values and helps ensure that segments with positive value will be credited with interest.
Benefits Of Indexed Universal Life Insurance
As is the case with any type of universal life insurance, its vital to thoroughly research any potential firms to ensure that theyre among the best universal life insurance companies currently operating. With that in mind, heres a look at some of the chief advantages of including IUL in your financial plan.
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Similar Life Insurance Types
A similar type of policy that was developed from universal life insurance is the variable universal life insurance policy . VUL lets the cash value be directed to a number of that operate like mutual funds and can be invested in stock or bond investments with greater risk and potential growth. Additionally, there is the recent addition of indexed universal life contracts similar to equity-indexed annuities which credit interest linked to the positive movement of an index, such as the S& P 500, Russell 2000, and the Dow Jones. Unlike VUL, the cash value of an Index UL policy generally has principal protection, less the costs of insurance and policy administrative fees. Index UL participation in the index may have a cap, margin, or other participation modifier, as well as a minimum guaranteed interest rate.
Universal life is similar in some ways to, and was developed from, whole life insurance, although the actual cost of insurance inside the UL policy is based on annually renewable term life insurance. The advantage of the universal life policy is its premium flexibility and adjustable death benefits. The death benefit can be increased , or decreased at the policy owner’s request.
With the requirement for all new policies to use the latest mortality table beginning January 1, 2004, many GUL policies have been repriced, and the general trend is toward slight premium increases compared to the policies from 2008.
Is Indexed Universal Life Insurance Right For You
Tarnow at AIG says IULs could be a good fit for people who want to participate in market performance but who may not want to have full financial exposure to market downturns.
âAlso, for consumers who have maxed out their available retirement plans, an IUL could allow them to contribute with fewer age restrictions and potentially grow cash value on a tax-deferred basis,â Tarnow says.
Expect higher costs and risks with IUL compared to most other types of life insurance. Youâll need to manage your cash value more actively than you would with other life insurance options, such as whole life insurance or guaranteed universal life insurance.
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Do You Have To Payback The Loans You Take To Create Income
No, you do not need to repay the loans taken out to create a retirement income from a life insurance policy. So long as the policy-owner dies while the policy is still in force, the death benefit of the policy will pay off the loans and the remainder will go to beneficiaries.
This planned outcome will also ensure that all income created by the life insurance policy remains tax-free.
Flexible Premiums And Death Benefit
You have the option to adjust your premiums and death benefit amount if needed. If your account accumulates enough value, you could use those funds to pay your premiums.
If you decide to underpay or even skip a premium, the cost of insurance charges and policy expenses will nonetheless be pulled directly from your cash value account every month. So long as the cash value account is sufficient to cover these monthly deductions, then the policy will remain in force and death benefits would continue to be payable.
On the other hand, there may be instances when you are required to pay more in premiums than you expected. For example, if the index performs poorly, the subtraction of monthly policy charges could cause the cash value to drop and your policy could lapse without an infusion of more premium. If your cash value falls too much, the insurance company could put out a âpremium call,â meaning you need to put in more money to avoid a policy lapse.
If your policy lapses, you lose out on all the money you put in, plus the death benefit.
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Iul Vs : Which Is Better For Retirement Savings
Indexed universal life insurance and 401 plans can both be used as investment tools for retirement. But there are some important differences to note. With IUL, returns are tied to the performance of an underlying index. If the index performs well, then your policy earns a higher interest rate. If the index underperforms, on the other hand, your returns may shrink. Your insurance company can also cap the rate of return credited to your account each year, regardless of how well the underlying index does. For instance, you may have a cap rate of 3% or 4% annually.
In a 401 plan, you have the option to invest in index mutual funds or ETFs but youre not locked in to just those investments. You can also choose actively managed funds, target-date funds and other securities, based on your time frame for investing, goals and risk tolerance. Your rate of return is still tied to how well those investments perform but theres no cap. So, if you invest in an index fund that goes up by 20%, youll see that reflected in your 401 balance.
A 401 also affords the advantage of an employer matching contribution. This is essentially free money you can use to grow retirement wealth. With an indexed universal life insurance policy, youre responsible for paying all of the premium costs.
Cost Of Indexed Universal Life Insurance
Indexed universal life insurance quotes are determined depending on the type of policy and particular insurer, says Flagg at Veralytic.
And your premium isnât the only âcostâ associated with an IUL. Indexed universal life insurance is known for having a lot of costs, administrative expenses, sales fees and commissions, the cost of insurance, surrender charges and more. These all impact the cost of your premiums and how much you can build in cash value.
When shopping around for an IUL policy, youâll be shown projections of the policyâs potential growth. These illustrations are based on predicted interest rates, fees and more. However, because itâs impossible to predict what the market will do in the future, these numbers are only estimates and not guaranteed. Plus, the illustration may not include certain caps or fees.
Make sure to focus on the guaranteed parts of the policy illustration, and donât assume your outcome will mirror the non-guaranteed projections.
âCurrent regulations in most states permit insurers to quote low premiums and/or project high account growthâwithout disclosure of either costs or the risks of additional premium calls, under-performance or policy lapse,â Flagg cautions. Thatâs thanks to a provision in the 2010 Dodd-Frank Act that exempts indexed universal life insurance from federal regulation.
It can make comparing the true value, costs and risks of various policy options very difficult.
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What Is The Difference Between Term And Permanent Life Insurance
Term life insurance only stays in effect for a predetermined number of years, which is typically between 10 and 30. It may be useful to policyholders who only want coverage for a certain period of time, such as during the length of their mortgage or while their children are young. Permanent life insurance remains active until the policyholder passes away, and typically includes a cash value portion that acts as a savings or investment account. However, permanent life premiums are typically much higher than term life premiums.
Indexed Universal Life: Life Insurance That Can Protect And Provide
Indexed universal life insurance is death benefit protection that also provides the opportunity to build long-term cash value by earning interest that is linked to the movement of a selected stock market index over a specific period of time. Although growth is based on a stock market index, your premium is not actually invested in the market or in the applicable index. IUL products are subject to all policy fees and charges normally associated with most universal life insurance.
That’s a mouthful, but essentially IUL products can protect your family and potentially provide for them in the long run.
Bet you didn’t know life insurance could do that.
With an IUL product, the policyowner can take advantage of the upward movement of a selected stock market index while being protected from a downward performance through the power of the 0% floor, meaning the index credited will not be less than zero percent.
In other words, a North American IUL policy can offer you the opportunity to build cash value without a negative index performance hindering your earning potential. The earning potential is calculated based on several factors, including a maximum interest rate, the amount of premium allocated to the index account, the floor, and/or a spread rate, which is subtracted from the index growth. The cash value you build may be used in many ways, from college funding1 for your kids, to helping supplement your retirement income.
Is Iul Better Than Whole Life
Not necessarily. IUL insurance policies have an investment element, which can grow and earn interest connected to an equity index. Whole life insurance is a more straightforward form of permanent life insurance, with a death benefit and cash value component that acts like a savings vehicle rather than an investment account.
National Association of Insurance Commissioners. “Life Insurance.“
Iul Fees Are Less Than Other Options
One of the most common myths about Indexed Universal Life insurance is that it is exorbitantly expensive. Youll read this a lot from advisors who dont want to lose your money to an IUL. IULs indeed have higher fees initially. For the first 5-10 years, depending on someones age and health, the IUL will have higher fees than other financial vehicles. However, you may have this policy to age 80, 90, or beyond. If youre 40 years old now, this policy may be with you for the next 50-60 years.
Fees are front-loaded in an IUL. They start higher and then decrease. After the first 10 years or so, the IUL fees begin to become less than the prices in other options. When you look at the costs over 30-40 years or more, the total IUL fees are much less than other options over time.
Watch the case study video below. I will show you in detail how the IUL fees compare.
The other point is that fees are only a problem in the absence of value. I personally dont mind paying fees if Im getting more in return than what I pay. Think about what you are receiving for the expenses in an IUL:
- Tax-free distributions
- Guaranteed protection from a stock market drop
- Life insurance tax-free death benefit
- Unstructured loans
- Living benefits
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The Iul Sales Problem
A little-known rule passed by Congress in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act exempts indexed universal life insurance from federal regulation. So, IULs are not regulated by the U.S. Securities and Exchange Commission, unlike stocks and options.
Insurance agents typically arent required to undergo the same training as stockbrokers to sell so-called derivative products such as options based on an underlying index like the S& P 500. Their only requirement is to be licensed by the state as an insurance agent.
Keep in mind that a wide range of consumer protections are in place for all life insurance customers, including a 10-day free look period after purchase, says Dolan.
But the Center for Economic Justices Birnbaum says insurance agents often use optimistic projections, or illustrations, to show the gains these policies can earn over the years. This makes it appear as if the policy will be costless in certain years, or you wont need to pay as much into it as other types of life insurance.
The problem is that these projections are not guaranteed, and may not come to fruition. People will buy IUL policies based on a fictional future and hit a hard reality when they have to pay substantially more than they expected in order to keep the policies in-force.
What Is Protection Indexed Universal Life Insurance
Protection indexed universal life insurance is a type of indexed universal life insurance that offers death benefit protection. Your policys death benefit will grow based on the performance of a selected index, such as the S& P 500. However, you will not be subject to the downside risk of the stock market, which means that your death benefit will never go below the guaranteed minimum amount.
Protection-indexed universal life insurance policies allow you to participate in the stock markets upside potential without worrying about the downside risk. This makes them an attractive option for people looking for a life insurance policy that offers long-term financial protection.
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How Does Iul Work
When you buy an IUL policy, youâre covered for the rest of your life. The IUL is a tax-advantaged investment product that offers a death benefit. IULs allow you to invest in the stock market without having to worry about losing your entire investment if the value of your portfolio drops. IUL gains are not taxed since they grow within the life insurance policy.You donât have to worry about making early withdrawals from IUL policies. IULs also offer cash value growth that is tax-deferred. This means that you donât have to pay taxes on any of the growth in your IUL policy until you withdraw the money. IULs are not subject to required minimum distributions . It also offers an additional cash value that can be borrowed if youâd like to use the money for other expenses.