24 September 2012 0 Comments

Understanding Life Insurance Policies — “INDEXED UNIVERSAL LIFE”

Indexed Universal Life (IUL) is a form of Universal Life covered in my previous blog.  Except, IUL produces a cash value based on the performance of investment indexes such as S&P 500, Dow Jones Industrial Average, and NASDQ-100.  There is also a fixed account option.

IUL’s are similar to Variable Universal Life (VUL) without the ability to select specific investment funds, but they have the added feature that there can never be a negative adjustment to policy cash values if the index experiences a negative result.  The insurance company is not actually investing in funds tied to these indexes; they are investing in hedge accounts.

Do not use IUL if your primary purpose is to provide guaranteed death benefit with lowest possible premium expenditure.  With IUL, your premium should be much more than the minimum required for the death benefit.  These policies should only be considered for the following purposes:

  • To create cash values in order to produce income during the lifetime of the insured.
  • To produce a policy with an abbreviated premium payment period.
  • To produce a policy whose death benefit will increase as the policy ages with an attractive IRR even in later years.

When you do consider using an IUL policy, the two moving parts that can have the greatest impact on performance are the participation percentage and cap rate.  If the agent tells you that the policy credits 100% of the index gain to your policy, you’ll want to ask if that 100% participation is guaranteed.  Even if it is, there will be a cap.  So you will want to ask if the S&P goes up by 25% in a given year, won’t your policy impose a cap on the amount credited—say 12%.  Next ask what the current cap is and what is the minimum cap that can be imposed?

The only thing certain about an IUL sales illustration is there’s a 100% certainty that actual policy performance will be different.  Always ask for an illustration at a lower crediting rate than what you are being shown, no matter how conservative the agent tells you a 7% assumption might be.  When using IUL to produce future income, monitor it very closely.  If you withdraw and borrow funds too aggressively you could end up with a tax nightmare if the policy lapses.

IUL is a good policy when used properly, and in today’s investment climate I like it better than Whole Life (WL).  But neither WL nor IUL should ever be considered until the appropriate amount of death benefit protection has been put in force and there is more premium available.

Next, I’ll be returning to annuities to discuss a new twist to Immediate Annuities.

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