There are many ways that someone can leave money behind for their heirs or beneficiaries. Indexed universal life insurance is just one of those many options. Unlike term life policies, indexed universal life never expires. It’s linked to a market index and can provide a tidy sum to provide for final expenses or estate needs over time.
Is this the right policy to consider for your needs? Here is a look at the pros and cons of indexed universal life insurance.
The Pros of Indexed Universal Life Insurance
1. There is a lot of potential for growth.
This type of life insurance shares the gains that come along when the stock index it is connected to experiences growth. Part of the premium that gets paid is put into the stock index and some plans even guarantee a growth rate of up to 2%. Others offer a “no-loss” clause so that even if the stock market crashes, none of the invested capital will be eliminated from the final payout.
2. It is a flexible-use life insurance plan.
The earnings that come from an indexed universal life insurance policy can be used to pay the premiums when they come due. They can also be withdrawn to reduce payouts upon death if there are expenses which need to be paid. All withdrawals from these policies are tax-free on the condition that the total amount withdrawn does not exceed the amount of premiums that were paid into it.
3. It’s a tax-free lump-sum payout to beneficiaries.
The tax code is very favorable in regards to life insurance policies. Beneficiaries will receive a lump-sum payout of the benefit upon death and the capital payment they receive is not subjected to income taxes. This does apply to the total premium amount paid into the policy only, however, as dividends and interest are taxed.
4. It provides a conservative investment benefit that outperforms other conservative investments.
An indexed universal life insurance policy is often compared to the stock market, but a more accurate comparison would be to CDs, savings bonds, or even a money market account. This is because the conservative interest gains seen in this industry are below 10%, yet higher than the sub 1% that many of these other investment tools provide.
The Cons of Indexed Universal Life Insurance
1. The growth potential is often capped on the offered policies.
The payout guarantees are often limited when it comes to indexed universal life. This is because the insurance company needs to make a profit in order to stay in business as well. The advantage is that you don’t have to do anything but pay your premiums to achieve growth. The disadvantage is that your growth might not actually be reflective of the true market growth that was achieved.
2. The management costs of this life insurance variation are very high.
Most insurance companies charge large fees to invest and manage the premiums on an indexed universal life insurance policy. This ultimately reduces the amount of capital that is available to be invested and growth is limited. It may sometimes even require policy holders to pay higher premiums to keep policies competitive so that growth can be achieved over time.
3. It may mature before death.
It is believed that the average American is under-insured by over $1 million. The issue with this type of life insurance is that it does allow some retirement financial security, but the disadvantage is that the policy can mature while the individual is still alive. The marketing says this means someone can have more cash value for their retirement, but it ultimately means a beneficiary may not ever seen anything from this type of insurance if someone lives long enough.
4. It is often treated as an investment when it shouldn’t be.
An indexed life insurance policy is more like a savings account that earns interest rather than an investment tool. It is supposed to be there when cash is needed and it can provide an estate or a beneficiary with a nice sum as a parting gift. What it shouldn’t be used for is the foundation of a retirement, but unfortunately this is often how it is treated. It is a cash value asset that protects against loss. Nothing more.
Is An Indexed Universal Life Insurance Policy Right For You?
There are some advantages to consider, but there could be some disadvantages that outweigh the gains that can be achieved. Safe money alternatives may need to be developed to protect a retirement or inheritance plan. Use these pros and cons to speak with your financial advisor to determine if this insurance product is right for you.