The benefits of IUL
An IUL policy is a life insurance policy that allows the owner to allocate premium amounts to an indexed account with interest crediting based on the performance of a designated market index, such as the S&P 500. In addition to the death benefit included in all life insurance policies, IUL offers the potential to indirectly capitalize on market gains.
- Minimum guaranteed interest rate — One of the most desirable benefits of IUL policies is the minimum guaranteed interest rate or floor, as well as the potential they offer for even higher cash value growth compared to whole life policies. While whole life policies provide a guaranteed interest rate, IULs can credit potentially higher rates based on the positive performance of a market index.
- Flexibility — IULs offer much more flexibility than many life insurance policies. For instance, policy owners get to decide how much to allocate among indexed and fixed accounts, adjust death benefit amounts as needed, and choose any available riders to make the policy customizable to their needs. For instance, a long-term care rider might allow policyholders to accelerate their death benefits to pay for long-term care, or a critical illness rider may provide additional protection if a policyholder faces a serious medical diagnosis.
- Tax-free gains — Finally, an IUL can also offer tax-free cash value growth. That means you don’t have to pay taxes on the increase in cash value over time. However, withdrawals from the policy that exceed cost basis will be taxable. The cash value inside IUL can also be accessed through tax-free loans that don’t have to be paid back during the insured’s life (the death benefit will be reduced by withdrawals, any outstanding loans and interest payments).
IUL terms to know
If you’re selling IUL policies, you’ll need to understand these terms and be able to explain to your clients what they mean.
- Caps — The cap is the maximum interest rate that can be credited to your policy.
- Floor — The floor, which is often zero percent, is the minimum interest rate based on changes to the specified market index. This means if a policy starts with $100,000 in cash value at the beginning of the segment period, and the floor is zero, the policy owner is assured that the cash value will drop no lower than $100,000 during that period. However, it’s worth noting that policy charges and fees would still be withdrawn.
- Index — A market index, such as the S&P 500, that interest crediting to the indexed account in based upon. Because policyholders may have the option to choose which index they want to use, you should be prepared to help them select the best index choice for their needs.
Making the IUL decision
An IUL policy may not be right for everybody, but it can be a valuable retirement and estate planning tool for some customers. To help determine whether it’s the right choice, ask your clients these two questions:
- Are you considering adding a tax-free component to your retirement income?
- Are you okay with variable cash value growth for your permanent life insurance?
If they say “yes” to these questions, take time to tell them more about IULs. These policies could be just the tool they’re looking for to meet their financial goals.
All payments and guarantees are subject to the claims-paying ability of the insurer.
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