Equity Indexed Universal Life Insurance: Riding the Market Up without the Risk

Equity Indexed Universal Life Insurance has been around about 20 years when TransAmerica issued the first policy back in 1997.  IUL is definitely considered an advanced insurance vehicle and may be difficult to explain to clients at first blush.  Let’s clear the fog associated with IUL so that we can address clients honestly and confidently when having a conversation about this exciting, cash-friendly insurance vehicle.  The foundation is easy to understand but may sound too good to be true.  In essence, with an Equity Indexed Universal Life Insurance policy, your client is able to ride the market up without the risk!

A Complex Policy with Intriguing Upside

Equity Indexed Universal Life (IUL) is a permanent life insurance policy with a cash accumulation component that is indirectly tied to a financial market index (think stocks, S&P500, Nasdaq, etc) and has a death benefit.  This means that when a policyholder pays their premium, the money is divided into components.  Part of it pays for the insurance itself, fees associated with managing the policy, commissions, and fees associated with managing the indexed investment.  After those have been paid, the remainder goes into an investment portfolio linked to the market index selected by the policyholder.  It is this money that grows alongside the index over the life of the policyholder for as long as the policy in force and has not lapsed.  

The cash value does not mirror the index completely, however, as the insurer also institutes a “participation rate” in the policy.  

The participation rate is the percentage of market gains that the cash value can increase with.  For instance, if the index from one month to the next gains 6% and the participation rate is 50%, then the cash value interest will compound at 3% or half the net gain.  The participation rate will vary from one policy to the next based on the insurer’s criteria.

Additionally, policyholders of an IUL can:

• Borrow against the cash value of the policy 
• Withdraw against the cash value of the policy (for supplemental retirement income, for example)
• Cash accrued in the market is tax-deferred until they withdraw it
• When the market tanks, the cash value simply doesn’t increase, but it does not lose value

What Happens to an IUL When the Market Takes a Downturn?

If the market index mirroring the IUL policy has a negative yield, the cash value does not increase and it doesn’t decrease either.  For that month, no additional money is added to the cash value.  Some policies have a fixed low-interest rate on the cash value (similar to Whole Life Insurance) that may result in a higher premium to guarantee the fixed interest rate.  This means that if an index tied to an IUL loses money for that month, and has a guaranteed interest rate of 2%, then the cash value will grow by 2% that month.  

Which Client is the Best Fit for an Indexed Universal Life Policy?

There are many people who would benefit from an IUL.  Cost is one factor to consider.  IUL’s and all permanent policies are significantly more expensive than a simple Term Life policy.  However, unlike Term Life, the money invested in an IUL has the capacity to grow over time.  Consider this:

A person in their 20’s or 30’s who purchase an IUL, assuming an average return of 6% compounded over time with $500 per month put into the index portion will have retirement income from the policy in excess of $50,000 per year by the time they are 65 years old!  In addition to this accumulation, they will also have the peace of mind of the death benefit that insurance provides.   

The tax-deferred aspect is also something to consider.  If a client is going to be in a relatively high tax bracket during their earning years but in a significantly lower tax bracket upon retirement, the money they withdraw against the cash value of the policy in retirement will be taxed on their retirement tax bracket and not their peak earning tax bracket (which is when the cash value was accumulating).  This is really what makes the investment special compared to many other financial investment vehicles.  

Businesses that need insurance for Key Personelle would also be an excellent fit for an IUL for the tax-deferred reasons mentioned above and also as an added hiring incentive to increase benefits without adding directly to salary.

Talk to Your Clients About the Advantages of an IUL

It’s important that you utilize the resources and team provided by Trust Financial to gain a comprehensive understanding of IUL’s and best practices in crafting policies for your investment savvy clients.  It is an excellent tool for wealth accumulation and insurance peace of mind.  It is an essential aspect of a retirement asset portfolio that will benefit many of your clients as they work and into retirement.