Life insurance is an important component of any successful financial plan. Before you can worry about building your assets or accumulating wealth, you need to protect the assets you already own. One of your most valuable assets is your ability to provide for your family, either financially or in other ways. Life insurance helps fill that void after you pass away.
While some life insurance needs can be met with term insurance, other needs may require more permanent protection. For instance, you may want to provide some level of death benefit for your spouse should you die in retirement. Or you may have long-term financial obligations that require ongoing life insurance protection.
When it comes to permanent life insurance, the common alternatives have traditionally been whole life, universal life and variable universal life. However, there is a relatively new option that may be worth considering. It’s called indexed universal life insurance, and it offers a unique set of benefits that combine to offer death benefit protection along with retirement income solutions.
Below are just a few of the reasons why indexed universal life insurance, also known as IUL, may be right for you:
Permanent Life Insurance Protection
The primary benefit of any life insurance policy is the financial protection offered to your beneficiaries after you pass away. Much like regular universal life and other permanent policies, IUL has a permanent death benefit that is in force as long as you meet the premium requirements. If you pay the premium for the rest of your life, then you can rest assured you will have a permanent tax-free death benefit in place for your beneficiaries.
Most permanent life insurance policies have a cash value component that accumulates over time. This cash value can often be used for loans, for withdrawals or simply to pay the remaining premiums.
In regular universal life insurance, the accumulation usually comes from interest. In a variable universal life insurance policy, you can invest your cash value in a variety of fund options, called subaccounts, and capture market returns.
Indexed universal life blends those two accumulation methods. Your cash value is linked to a market index, such as the S&P 500 or the Dow Jones industrial average. If the index performs well, you earn some level of interest based on that performance.
Generally, the better the index performs, the more interest you earn. That means you could possibly grow your cash value faster in an IUL than in a traditional whole life or universal life policy. The way interest is applied varies from policy to policy, so make sure you analyze how interest is calculated before moving forward.
In a variable universal life policy, your cash value can actually decline. Because your funds are invested in the market, they’re exposed to all the same risks and volatility that you might find in stocks, mutual funds or other vehicles.
In an IUL, you aren’t actually invested in the index. Rather, the performance of the index is simply used to calculate your interest rate. In many policies, if the index has a negative year, you don’t lose money. You receive a guaranteed minimum rate, which could be zero percent. While it may not be ideal to earn zero interest, you can have confidence that you won’t lose money because of market volatility.
Tax-Free Retirement Distributions
Permanent life insurance comes with a unique feature that allows you to take loans, as opposed to withdrawals, from your policy. If the distribution is structured as a loan, it’s not taxable. Of course, all loans have to be repaid. However, if you choose not to repay the loan, it can simply be deducted from your death benefit.
Of course, there are other factors to consider. Your loan amount may be charged interest, which could cut into your cash value and its future growth. If the loan interest goes unpaid, it could be added onto the balance, which may erode the future benefit for heirs.
A tax-free loan distribution is something that should be explored very carefully. However, if you’ve had significant appreciation in your cash value, it may be one way to collect supplemental retirement income.
Long-Term Care Coverage
Many IUL policies provide flexibility to help you cover long-term care costs. This could be an important feature for you in retirement. The U.S. Department of Health and Human Services estimates that the average 65-year-old has a 70 percent chance of needing long-term care in their lifetime.1 As you might imagine, long-term care can be very costly, and it could drain your assets.
Some policies allow you to take an advance on your death benefit so you can use it for long-term care expenses. You may be able to hire in-home care, pay for assisted living or even modify your home to accommodate a wheelchair or other mobility issues.
There’s no way to know for certain whether an IUL policy is right for you without knowing your unique needs and objectives. While it can be a useful tool, IUL isn’t for everyone.
Contact us at Baacke Insurance Services to schedule an initial consultation. We are happy to learn more about your goals and help you develop the appropriate strategy. Let’s connect today.
This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
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