As smartphones have become more prevalent these days, people tend to love the fact that you can do so many different things with them. What used to be just a cellular phone now serves as a phone, email device, GPS system, calendar, camera, rolodex — you get the point. In other words, they are pretty much an all-in-one device now.
In many ways, today's indexed universal life insurance (IUL) policies can also be viewed as all-in-one financial device, too. Whereas term insurance can protect you with a death benefit, indexed universal life insurance can do that and a whole lot more.
Here are just some of the key features of IUL. (For further reading, see: When to Update Your Life Insurance Beneficiaries.)
Death Benefit Protection
First, the death benefit protection is a given — and, while going with just a straight term life insurance policy may cost less in terms of premium, an indexed universal life insurance policy will last you for the remainder of your lifetime. It will also build up cash value.
Opportunity for Growth
Within the cash value component of an IUL policy, you have the opportunity to grow your funds based on a market-linked index, such as the S&P 500 or the Dow Jones Industrial Average (DJIA). This can provide you with the ability to earn a higher return than that of other types of permanent policies such as whole life, or even regular universal life insurance.
Protection of Principal
While there is the opportunity for additional growth of funds, there is also protection of your principal in the event of a market downturn with IUL. This is because should the underlying index lose value in any given period, your account is simply credited with a 0%. This not only protects your funds from loss, but also alleviates the need to make up lost ground from negative years. (For related reading, see: Long-Term Care: Traditional vs. Alternative Policies.)
Cash for Long-Term Care Needs
Many of the IUL policies that are on the market today will also advance you a portion of the death benefit in order to pay for a long-term care need. In some cases, the amount could even be up to 100% of the death benefit proceeds.
Access to Funds
The cash that is in the cash value component can either be withdrawn or borrowed for any reason. This money can be used for paying off high interest credit card debt, personal loans, or even your home mortgage.
Supplemental Retirement Income, Tax Free
Given its unique loan provisions, you can also use an indexed universal life insurance policy's cash value to help in supplementing your retirement income. This can be especially beneficial if you are trying to fill an income gap and/or if you are under age 59½ and don't want to face the IRS early withdrawal penalty that can be levied on many other plans such as annuities and traditional IRAs. (For related reading, see: How Annuities Can Boost Your Retirement Confidence.)
Protection from Creditors
In many areas of the country, IUL cash values are also exempt from lawsuits and the claims of creditors. This includes bankruptcy.
Taking the Next Step
While indexed universal life can present numerous advantages over other forms of life insurance coverage — especially from a cash value perspective — not all IUL policies are created equally.
With that in mind, it’s important to take a close look at what is available to you in order to determine what will fit best with your specific goals, needs, and time horizon. That way you can be better assured that the particular plan that you decide on will be the one that’s right for you and those you care about. In doing so, it’s best not to shop through insurers that can only offer you just one option, but rather an agency that can provide you with many available choices that you can compare and so that you can determine in an unbiased manner which plan will work the best for you.
When you’re ready to move forward, an independent insurance advisor can help you put together the right plan for generating tax-free retirement income in the future and one that will protect your loved ones while you wait. (For further reading, see: Universal Life Insurance: Hidden Dangers for Retirees.)
Brad Cummins, founder of LocalLifeAgents, a Columbus, Ohio-based firm of independent insurance agents.