 Personal Finance PowerPoint Presentation. Indexed, Universal Life Insurance, I-U-L. Prepare to get financially fit by practicing personal finance. Insurance is part of our long-term risk mitigation strategy where we follow the adage of measure twice, cut once, put in a formal process in place, look in something like set the goal, develop a plan to reach them, put the plan in action, review the results and repeat the process periodically. Most of this information can be found at Investopedia, Indexed, Universal Life Insurance, I-U-L, which you can find online. Take a look at the references, resources, continue your research from there. This by Stephanie Powers, updated May 27, 2022. In prior presentations, we've been looking at insurance in general. Now moving to the life insurance, we looked at the two major categories of life insurance. We always wanna keep in mind the term or peer life insurance versus the permanent life insurance. The universal life being in category two, part of the permanent life insurance. And I would always compare and contrast it to the peer or term life insurance, looking at the adage often used by people that sell the term life insurance of invest in the term life or purchase term life and then invest the difference because the term is usually cheaper as you are purchasing just insurance. And then if you're looking at more complex instruments, asking the question, why wouldn't I do that? Why wouldn't I take that adage? What added complexity or what benefits am I trying to achieve with the more complex life insurance structures such as tax strategies or different kind of covered strategies or estate planning strategies? Keeping that in mind, what is universal life insurance? So universal life, that's the UL insurance comes in many different flavors from fixed rate models to variable ones where you select various equity accounts to invest in. Indexed universal life IUL insurance allows the owner to allocate cash value amounts to either a fixed or equity index account. So now we've got this cash value component. So you got this investment component to it and the index funds are like these average, like kind of like the average types of funds when they're trying to get an idea of certain account categories within the full stock market such as the S&P 500 being a common type of index fund. So possibly then having the ability to tie that kind of cash value, that investment component to say an index fund giving you a little bit more flexibility. So policies offer a variety of well-known indexes such as the NASDAQ 100 and the S&P 500. So the IUL insurance policies are more volatile than fixed ULs, but they are less risky than the variable UL insurance policies because no money is invested in equity positions. The IUL insurance policies offer tax deferred tax accumulation for retirement while maintaining a death benefit. So now you got the investment component which could have tax benefit components to it. But again, you would want to be asking the question of why wouldn't I buy the cheaper term policy possibly and then invest the difference in say like an IRA or a 401K plan where I could have kind of tax benefits as well. So you want to dig a little bit deeper in terms of what your exact goals are with relation to a more complex life insurance strategy. So people who would need permanent life insurance protection but wish to take advantage of possible cash accumulation via an equity index might use IULs to as critical person insurance for business owners, premium financing plans or state planning vehicles. So IULs are considered advanced life insurance products in that they can be challenged to adequately explain and understand. So clearly you've got more going on here. You've got the life insurance component. You've got kind of an investment type of component. And now you're tying that investment to basically a stock market or index kind of structure which does add some levels of complication. And the only reason you want to add levels of complication instead of just buying simple term life insurance and then investing straightforward into the market is that if you had some more complex goals you're looking for complex goals possibly for larger or more high income individuals which could be more advanced tax planning strategies and possibly estate planning strategies. So how does indexed universal life IUL insurance work? When you take out an indexed universal life insurance policy your insurer will help you select the index to use for the cash value account part of your policy and your death benefit. When a premium is paid on the account a portion pays the cost of insurance based on the insured's life. Any fees are paid and the rest is added to the cash value. The total cash value is credited with interest based on increases in an equity index but it is not directly invested in the stock market. If you own an indexed universal life policy you can likely borrow against the cash value issued in the policy. So we talked about this cash value in prior presentations with some of the permanent life insurance and the possibility of borrowing against it in the event that you have kind of a need or emergency for it which might give you a little bit more access to it than if it was locked under the umbrella of like a 401k plan or an IRA. However, if you do not pay back your loans they are deducted from the death benefit. So some policy allow the policy holder to select multiple indexes. IULs usually offer a guaranteed minimum fixed interest rate and a choice of indexes. Policy holders can decide the percentage allocated to the fixed and indexed accounts. The selected index value is recorded at the beginning of the month and compared with the value at the end of the month if the index increases during the month the interest is added to the cash value. So in other words, they're kind of pegging it to the index but your funds that are actually within the insurance policy are not actually invested in the market. They're basically using a system to try to peg the returns to the fluctuations in the market. So the index gains are credited back to the policy either on a monthly or an annual basis. Example of universal life insurance IUL. For example, if the index gained 6% from the beginning of June to the end of June the 6% is multiplied by the cash value. The resulting interest is added to the cash value. Some policies calculate the index gains on the sum of the changes for the period while other policies take an average of the daily gains for a month. So no interest is credited to the cash account if the index goes down instead of up. The gains from the index are credited to the policy based on a percentage rate referred to as the participation rate. The rate is set by the insurance company and can be anywhere from 25% to more than 100%. For example, if the gain is 6% the participation rate is 50% and the current cash value total is $10,000. $300 is added to the cash value that's a 6% times 50% times the $10,000 that's equaling the $300. The IUL policies typically credit the index interest to cash accumulations either once a year or once every five years. So what are the advantages and disadvantages of the index universal, the IUL insurance? Well, not for everyone. IUL insurance policies are a variable option for people for permanent life insurance with a cash component that earns interest plus a death benefit. This type of life insurance is more expensive than term life insurance. So you always wanna be going back to that adage on the term comparing to the term and investing the difference. Why are you not doing that? What added advantage are you getting? What are the goals you're looking for? But you get permanent coverage. That's one of the things. You got the permanent coverage as opposed to the term coverage although the term coverage can often coverage you for the term in your life that you need the coverage for and death benefit paid to your beneficiaries when you die. The policy may even increase in value due to the cash value component and you may be able to borrow from your account. So advantages, there's a low price. The policy holder bears the risk so the premiums are low because if you're the policy holder if there's less risk to the insurance company then that could lower the premiums as you're taking on more of the risk. Cash value accumulation amounts credited to the cash value grow tax deferred. So you got that tax component to it which is nice but again you wanna be comparing that to why don't I buy the term insurance where it might be cheaper and then invest into like a tax savings account like an IRA or a 401K plan so that you would wanna be comparing those options and seeing what your goals are. The cash value can pay the insurance premiums allowing the policy holder to reduce or stop making out of pocket premium payments. Flexibility, the policy holder controls the amount risked in indexed accounts and the death benefit amounts can be adjusted as needed. Most IUL insurance policies offer a host of optional writers from death benefit guarantees to no lapse guarantees. Death benefit, this benefit is permanent not subject to income or death taxes and not required to go through probate. Less risk, the policy is not directly invested in the stock market thus reducing risk as so that's one kind of benefit as opposed to if you took the money and invested in a permanent or regular life insurance term insurance and invested the difference in the market you might be taking on a little bit more risk although again you'd also have more potential for gain because it's probably gonna have less fees as you basically invest directly in the market. Easier distribution, the cash value in IUL insurance policies can be accessed at any time without penalty regardless of a person's age unlimited contribution. IUL insurance policies have no limitations on annual contributions. What are the disadvantages? Caps on accumulation percentages. Insurance companies sometimes set a maximum participation rate that is less than 100%. Better for large face amounts. Smaller face values don't offer much advantage over regular UL insurance policies based on equity index. If the index goes down, no interest is credited to the cash value. Some policies offer a low guaranteed rate over a longer period. Investment vehicles use market indexes as a benchmark for performance. Their goal is normally to outperform the index. With IUL the goal is to profit from upward movements in the index. These indexed universal life insurance IUL, a good investment. I expect a yes or no answer here. Yes or no, here we go. And IUL can be a good way to save money in a cash value account connected to a market index. It may earn modest interest but it is first and foremost a life insurance policy not an investment vehicle. You kind of evaded the question here. I was expecting a yes or no there. It looks like it depends answer. Can you lose money in an index universal life insurance policy in IUL? It is unlikely you will lose money in IUL because insurance agencies set a guarantee to your principal to protect it against losses in the market. However, there is often a cap on the maximum amount you can earn. Is indexed universal life insurance IUL better than a 401K plan? For most people, no. IUL is not better than a 401K plan in terms of saving for retirement. So this is when you always are going back to the old adage of why don't I buy just to term life insurance and then invest the difference possibly still gaining some tax benefits such as putting it under the umbrella of a 401K plan on IRA for example. So oftentimes you might be making out more from an investment standpoint to do that. And then the question would be, do you have some more complex strategy that is in play, other goals that you are seeking that make it more worthwhile to use these more complex life insurance instruments? So most IULs are best for high net worth individuals looking for ways to reduce their taxable income. So oftentimes you have more complex tax strategies taking place often necessary when income is higher. A 401K is a better investment vehicle because it does usually come with the high fees and premiums of an IUL. So the IUL in other words is the one that typically has the high fees and premiums because it's a more complex kind of instrument that it's taking place rather than just investing directly into the market which is under just like an umbrella of a 401K plan or an IRA or something like that. Plus there's not a cap on the amount you may earn unlike an IUL policy. What are the cons of an indexed universal life, an IUL? Indexed universal life policies have a cap set on how much money you can accumulate often less than 100% and they are based on an equity index. Well, you may not lose any money in the account if the index goes down, you won't earn interest. If the market turns bullish, the earnings on your IUL will not be as high as a typical investment account. The high cost of premiums and fees make IULs expensive and considerably less affordable than term life. So is IUL better than whole life than 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.