{"id":6691,"date":"2019-09-10T09:12:08","date_gmt":"2019-09-10T14:12:08","guid":{"rendered":"https:\/\/www.figmarketing.com\/blog\/?p=6691"},"modified":"2024-08-07T15:04:49","modified_gmt":"2024-08-07T20:04:49","slug":"finding-the-right-indexed-universal-life-insurance-policy","status":"publish","type":"post","link":"https:\/\/www.figmarketing.com\/blog\/finding-the-right-indexed-universal-life-insurance-policy\/","title":{"rendered":"Finding the Right Indexed Universal Life Insurance Policy"},"content":{"rendered":"\n

Updated August 7, 2024, at 12:53 PM<\/em><\/p>\n\n\n\n

How do you find the right indexed universal life insurance policy for a client?<\/p>\n\n\n\n

Much is said about the indexed universal life insurance policy and its impact and growth over the last several years in the life insurance industry. It’s no wonder that indexed universal life (IUL) policies have represented 24% of overall individual life sales and 65% of total universal life sales.<\/a><\/strong><\/p>\n\n\n\n

Many industry experts have weighed in on IUL’s product mechanics, costs, benefits, and features. And although these are very important, we’ll examine a few of the common uses of a maximum-funded (max-funded) IUL policy, while offering some caution in certain circumstances where IULs may not be the most appropriate product choice.<\/p>\n\n\n\n\n\n\n

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\"Life<\/a><\/figure><\/div>\n\n\n

First, let\u2019s define what a \u201cmax-funded\u201d IUL is. <\/p>\n\n\n\n

IUL is a permanent life insurance policy that builds cash value by crediting interest based on some external index strategy. Because it\u2019s a permanent universal life (UL) policy, there are an infinite amount of ways to fund such a policy.<\/p>\n\n\n\n

That is, as defined by the insurance company, a client could pay a minimum premium to cover policy expenses and prevent the policy from lapsing from year to year. Alternatively, he or she could pay a \u201cmaximum\u201d premium as allowed by the IRS to take advantage of the favorable tax treatment of permanent life insurance, or anywhere in between. For our purpose, we’ll examine the max-funded scenario.<\/p>\n\n\n\n

Related: A Look at IUL Fees, Costs, & Illustration Manipulation<\/a><\/h4>\n\n\n\n

IULs for Income Replacement<\/h2>\n\n\n\n

Using an oversimplified example, if a client pays $1 and can leverage it to $100 in the event of premature death, and<\/em> that $100 can be paid income-tax-free to the beneficiary, this can be a good deal from a financial standpoint. The $100 can be used to replace the income lost because of the premature death. An IUL might not be the best fit for income replacement when a client wants to protect his or her family with life insurance without the ability to pay for a max-funded IUL policy.<\/p>\n\n\n\n

Income replacement is one of the primary reasons that clients purchase life insurance. Further, there are two core elements of any life insurance policy\u2014including IULs\u2014that make it attractive from an income replacement standpoint: leverage and tax-efficiency. <\/p>\n\n\n\n

To adequately fund the IUL, it might require $4 to create $100 of benefit. However, for a term policy, the outlay might be $1. So, if the client is on a tight budget, you might see strong consideration for the term policy instead of the IUL. In either case, there\u2019s still significant leverage and tax benefit.<\/p>\n\n\n\n

Retirement Income Supplement<\/h2>\n\n\n\n

Most financial experts will agree that a predictable stream\nof income is vital to the success of a client’s finances in retirement. While\ngrowth and accumulation are essential during a client\u2019s working years, creating\nthe income they can’t outlive becomes more critical during their retirement\nyears. <\/p>\n\n\n\n

An IUL can be a useful product and play an important role in retirement. During a client\u2019s working years, the IUL\u2019s cash value grows and accumulates. Then in retirement, they may be able to take income-tax-free distributions from this policy to supplement other sources of retirement income.<\/p>\n\n\n\n

It\u2019s important to consistently monitor the IUL to ensure that it has enough value to continue to support the income being distributed to the client. One idea might be to use this retirement supplement IUL policy as a \u201cbackstop\u201d in case their other retirement accounts don\u2019t perform as intended, or if you\u2019re looking to reduce their income tax in a particular year. IULs offer flexibility to take income from the policy on an \u201cas-needed\u201d basis and don\u2019t require a consistent, static amount each month or year. <\/p>\n\n\n\n

Because of an IUL\u2019s ability to produce income-tax-free distributions, it might be easy for a client to consider the thought of, \u201cWell, why don\u2019t I put all my money in this IUL?\u201d Though tempting, it\u2019s generally not sound advice to suggest a client put all of their eggs in one basket. Other financial products exist that can be layered in with an IUL to create tax efficiency\u2014and even guarantees\u2014for the client. The scope of this paper won\u2019t cover these other products, however. <\/p>\n\n\n\n

Related: IUL vs. Whole Life Insurance: What are the Differences?<\/a><\/h4>\n\n\n\n

IULs: Life Insurance for the Living<\/h2>\n\n\n\n

Up to this point, we\u2019ve covered two of the most common uses\nfor IULs: income replacement and supplemental retirement income. Living benefit\nriders or provisions are useful aspects that most IUL policies possess. These\ngive the client the ability to use part or all of the policy death benefit for\npurposes of a chronic, critical, or terminal illness. <\/p>\n\n\n\n

Since an IUL is still a life insurance policy first, these benefits aren\u2019t typically the primary driver of a purchase. However, they give IULs additional flexibility and provide the client with more options to use the policy during his or her lifetime.<\/p>\n\n\n\n

Chronic illness benefits, in particular, have become a\npopular \u201cliving\u201d benefit in the industry. This is no surprise since the cost of\nlong-term care (LTC) continues to increase, and the options for insuring\nagainst this cost have become limited in the traditional LTC insurance space. <\/p>\n\n\n\n

However, buying an IUL solely to mitigate LTC or chronic illness risk would be a misstep. Furthermore, thinking an IUL is the only financial product that a client needs to handle this risk is also a mistake. Certainly, IULs can provide a chronic illness benefit, but it\u2019s generally recommended to consider alternative products as part of an overall strategy to cover the LTC risk\u2014not just IULs.<\/p>\n\n\n\n

Other potential uses for a max-funded IUL:<\/h5>\n\n\n\n