Co-Founder, Coastal Financial Partners Group, California
First and foremost, the objective is of life insurance is to provide valuable death benefit protection. If you're looking at taxable investments to help secure your retirement years, your life insurance professional can show you ways to use the tax-advantages and growth potential of cash value life insurance.
A properly designed life insurance policy can provide:
Death benefit protection
No income limits - unlike with 401(k)s, traditional IRAs, or Roth IRAs
Tax-advantaged cash value growth potential
Supplemental retirement cash flow through tax-advantaged loans and/or withdrawals of policy values
Cash flow that will not increase your overall tax expense or cost of government programs like Social
Security and Medicare
The key to the cash value and income features is how cash values grow. The index feature provides the opportunity to have the policy value allocated between Indexed Accounts and a Fixed Account. The Indexed Accounts are eligible for Indexed Interest which is non-guaranteed interest based on fluctuation in a stock price index such as the S&P 500 that may be credited to the Indexed Accounts at the end of each segment year. The interest rate for all accounts will have a guarantee to never go below some minimum rate such as 1% annually.
This approach is a good idea and may be something to consider. A life insurance professional can help determine if it fits with your objectives.
The methodology to determine if indexed universal life (IUL) is a good investment is the suitability of the investor. IUL is a long term commitment with surrender charges in the first 9-15 years that can be punitive, so the need for liquidity can’t be a priority. Consumers who need liquidity are not suitable for IUL. Like all investments, IUL has policy expenses; chief among them is the cost of insurance. If the insured is a smoker or the nonsmoking health classification is standard or substandard, the cost of insurance may be prohibited, so health becomes a suitability item.
Additional policy expenses beyond the cost of insurance could also be a suitability consideration. The policy expenses are deducted from the premium. In a year that the index is negative, nothing is added to the index accumulating amount, but policy expenses are nevertheless deducted from the policy. Keep in mind that the S&P 500 was negative from 2001- 2003, and the average policy expense were greater than 4%, so they generated a 4% compounded loss over three years. And remember, that doesn't include any surrender charges.
The #1 unaddressed policy expenses IUL as an investment is policy expense loans, which are generally illustrated with fixed or variable loan charges at current company practice. There are loan rate caps, regardless in a negative crediting year; with the policy generating income the loan cost could be economically nonviable.
IUL must be designed with the least expense loads at the policy issue date. The investor must hold the contract for the life of the insured to maintain the minimal coverage purchased and tax advantages of life insurance income. A life insurance professional, whose expertise in the design and architecture of IUL as an investment is imperative. The vast majority of life insurance agents selling IUL woefully lack the training and knowledge to construct IUL as an investment.
Founder, Abrams Insurance Solutions, Inc., San Diego, CA
I view indexed universal life insurance as more of a savings vehicle than an investment. Investments are subject to market risk and can lose money if the market (stock, real estate, bonds, etc.) declines.
Indexed universal life offers protection from downside risk and upside potential for growth. This means that if your policy is indexed to the S & P, your money is not invested in the S & P, but the S & P is only used as a gauge of how much interest to credit to your policy. If the S & P increases 10% for the year, then 10% interest is credited to your policy. If the S & P goes down 20% for the year, then you get a 0% - 2% return for the year (depending on your policy specifics).
Insurance charges are subtracted from your policy's cash value, so even if you get a 0% interest credit for the year, your cash value may decline slightly. However, depending on your age and health, the fees may be less in your life insurance policy than many other financial vehicles. The benefits of life insurance as a cash accumulation vehicles far outweigh other financial vehicles.
In summary, if you are looking for a "safe" place to grow your money with no market risk, protection from taxes, and accessibility to your money, Indexed Universal Life Insurance is a great option to learn about.
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A properly designed life insurance policy can provide:
Death benefit protection
No income limits - unlike with 401(k)s, traditional IRAs, or Roth IRAs
Tax-advantaged cash value growth potential
Supplemental retirement cash flow through tax-advantaged loans and/or withdrawals of policy values
Cash flow that will not increase your overall tax expense or cost of government programs like Social
Security and Medicare
The key to the cash value and income features is how cash values grow. The index feature provides the opportunity to have the policy value allocated between Indexed Accounts and a Fixed Account. The Indexed Accounts are eligible for Indexed Interest which is non-guaranteed interest based on fluctuation in a stock price index such as the S&P 500 that may be credited to the Indexed Accounts at the end of each segment year. The interest rate for all accounts will have a guarantee to never go below some minimum rate such as 1% annually.
This approach is a good idea and may be something to consider. A life insurance professional can help determine if it fits with your objectives.
Additional policy expenses beyond the cost of insurance could also be a suitability consideration. The policy expenses are deducted from the premium. In a year that the index is negative, nothing is added to the index accumulating amount, but policy expenses are nevertheless deducted from the policy. Keep in mind that the S&P 500 was negative from 2001- 2003, and the average policy expense were greater than 4%, so they generated a 4% compounded loss over three years. And remember, that doesn't include any surrender charges.
The #1 unaddressed policy expenses IUL as an investment is policy expense loans, which are generally illustrated with fixed or variable loan charges at current company practice. There are loan rate caps, regardless in a negative crediting year; with the policy generating income the loan cost could be economically nonviable.
IUL must be designed with the least expense loads at the policy issue date. The investor must hold the contract for the life of the insured to maintain the minimal coverage purchased and tax advantages of life insurance income. A life insurance professional, whose expertise in the design and architecture of IUL as an investment is imperative. The vast majority of life insurance agents selling IUL woefully lack the training and knowledge to construct IUL as an investment.
Indexed universal life offers protection from downside risk and upside potential for growth. This means that if your policy is indexed to the S & P, your money is not invested in the S & P, but the S & P is only used as a gauge of how much interest to credit to your policy. If the S & P increases 10% for the year, then 10% interest is credited to your policy. If the S & P goes down 20% for the year, then you get a 0% - 2% return for the year (depending on your policy specifics).
Insurance charges are subtracted from your policy's cash value, so even if you get a 0% interest credit for the year, your cash value may decline slightly. However, depending on your age and health, the fees may be less in your life insurance policy than many other financial vehicles. The benefits of life insurance as a cash accumulation vehicles far outweigh other financial vehicles.
In summary, if you are looking for a "safe" place to grow your money with no market risk, protection from taxes, and accessibility to your money, Indexed Universal Life Insurance is a great option to learn about.