What is Indexed Universal Life Insurance?
IUL, or indexed universal life insurance, is a type of permanent life insurance policy that offers death benefit protection for your lifetime, as well as a cash value component that provides you with the opportunity for higher returns than regular universal life insurance yet without downside market risk.
What makes IUL different from other permanent life insurance policies is how interest is credited to the policy’s cash value portion. With IUL, in addition to having a declared interest rate, there is also the ability to earn a return that is linked to the movement of an underlying stock market index, such as the S&P 500.
What Are The Universal Life Insurance Tax Benefits?
There can be several attractive universal life insurance tax benefits. First, the funds that are in the policy’s cash value component are allowed to grow tax-deferred. This means that the money can accumulate over time, without the policyholder having to pay tax on the gains while they remain in the account. This can allow for exponential growth over time, as the cash value funds earn interest on the principal, as well as interest on the past gains, and interest on money that would otherwise have been paid out in taxes.
Because there are no maximum contribution limits like there are with qualified retirement plans (such as 401k plans), and with traditional IRAs, an IUL policyholder can also earn additional tax-deferred gains by placing more money into the policy.
If an indexed universal life insurance policyholder wants access to the cash value funds, he or she could do so via an IUL policy loan, rather than through a withdrawal. In doing so, the money from the IUL policy can also be accessed tax-free in order to supplement retirement income or use it for any other purpose.
When the death benefit on an indexed universal life insurance policy is paid out to the beneficiary (or beneficiaries), this money is received free of income taxation – which in turn, allows the recipient to use 100% of these proceeds.
Using IUL as a Tax-Free Retirement Savings Vehicle
If you have a large IRA account, then it is likely you will also have a large tax problem. When you begin to take your withdrawals in the future, you will be taxed on both the contributions and any gains. If you contributed to your traditional IRA pre-tax, and the funds inside the account have grown tax-deferred, 100% of the money taken out of the account will be subject to income taxation.
IUL Tax Advantages For Small Businesses
While indexed universal life insurance can help to solve many personal and family financial needs, this type of policy may also be well suited for those who are business owners. Business owners can face many financial related challenges – and an IUL policy could be the ideal solution. These policies can provide one or all of the following benefits for you if you are a business owner:
Tax Free investments and other benefits for Business Owners
Tax-Deferred Growth of Cash Value
Because an IUL policy allows the tax-deferred growth of cash value, your funds can grow and compound exponentially over time.
No Market Risk
Due to IUL policy cash values having a “floor,” there is no downside risk to your principal in these plans – even if the underlying index that is being tracked suffers a substantial loss or experiences a high rate of volatility. This means that you can count on having your principal protected for the short- and the long-term.
No Maximum Annual Contribution Limits
Although you may invest in a qualified retirement plan through your business, these savings vehicles will typically have annual maximum contribution limits. Unfortunately, this can hold you back from accumulating additional funds you may want or need in the future. An IUL policy, however, is not subject to these contribution limits, which means that you can continue funding your IUL policy, even if you have already “maxed out” your other retirement savings options
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Tax-free Retirement Income Supplement
Even though traditional retirement plans and IRAs allow the tax-deferral of growth, these plans are essentially just postponing your ultimate tax liability. Indexed universal life insurance policies, however, allow you the ability to access your cash value tax-free for supplementing your retirement income – which means that you can have full access to the money you obtain.
Life Insurance to Grow College Funds
Life insurance is an essential piece of almost every family’s financial plan. It provides client’s peace of mind knowing that their families are protected in the event of an untimely death. But there are other methods by which families may utilize this product. The premiums paid toward an Indexed Universal Life insurance policy can serve two purposes. The same policy that protects loved ones may also build accumulation value that can be used for a variety of needs, including education funding. As tuition prices continue to rise, families must plan to put away more money for their children’s and grandchildren’s future education needs. Some fund this need using mutual funds, CDs, or 529 Education Savings Plans.
However, an IUL policy may be a viable dual-purpose alternative that:
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Provides Tax-Deferred Accumulation Value
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Protects money from risk Minimizes tax burden while building Accumulation Value
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Provides downside protection in bad economic conditions
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Allows control of the of the accumulation value and whether to take policy loans
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Is not a “countable asset” when child applies for college financial aid
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Allows access to tax-deferred accumulation value for education funding
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Guarantees a generally tax-free death benefit to ensure reaching education goals
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