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Indexed Universal Life (IUL) insurance is a form of permanent life insurance that offers both a death benefit and a cash value component. Its unique feature is that the cash value can grow based on the performance of a stock market index, such as the S&P 500, while also providing downside protection.
How It Works
- Provides lifelong death benefit coverage if funded properly
- Cash value grows based on a stock market index (e.g., S&P 500)
- Features a cap on growth and a floor (typically 0%) to prevent losses in down years
- Flexible premiums and the option to overfund for faster cash value growth
- Tax-deferred cash value accumulation and potential for tax-free loans
Benefits of IULs
1. Lifetime Coverage
IUL provides permanent life insurance protection, not just temporary term coverage.
2. Tax-Deferred Growth
Cash value grows without being taxed annually, similar to retirement accounts.
3. Downside Protection
The cash value has a floor, often 0%, ensuring you don’t lose money during market downturns.
4. Market-Linked Upside
When markets perform well, you can earn returns based on index performance, subject to a cap.
5. Tax-Free Loans and Withdrawals
Policyholders can borrow against the cash value tax-free for retirement income, emergencies, or other needs.
6. Flexible Premiums
You can adjust premium payments and even overfund the policy to increase cash value accumulation.
7. No Contribution Limits
Unlike IRAs and 401(k)s, there is no annual cap on contributions, giving high-income earners flexibility.
8. No Required Minimum Distributions (RMDs)
There are no mandatory withdrawals at age 73 as with traditional retirement accounts.
9. Estate Planning Advantages
Death benefit proceeds pass to beneficiaries income-tax free, making IUL useful for legacy and wealth transfer planning.
Things to Watch Out For
- Growth is subject to caps and participation rates, limiting market upside
- Fees and administrative costs can be high, especially in early years
- Loans reduce the death benefit if not repaid
- Policy must be adequately funded to avoid lapse