Is IUL insurance right for me?

What is IUL?

IUL is a type of permanent life insurance that comes with a savings component. Part of your premium goes toward securing your death benefit, while the rest builds cash value over time. This cash value grows based on the performance of a specific stock market index, such as the S&P 500. However, you won’t directly invest in the market, which helps protect your cash value from losses during downturns.

At the same time, IUL policies typically have a cap on earnings, so you won’t experience unlimited growth, even during strong market years.

Benefits of IUL insurance

The great thing about IUL is that it combines life insurance with the chance for tax-advantaged growth. Here’s why it stands out:

Tax-free growth potential: The cash value in your policy can grow tax-free, meaning you won’t owe taxes on any gains. This is especially beneficial for high-income earners who are looking for ways to reduce their taxable income. Additionally, the death benefit paid out to beneficiaries is typically free from federal income taxes.

Flexibility: Unlike other types of life insurance, IUL policies allow for flexible premium payments and adjustments to coverage amounts. This means you can increase or decrease the amount of coverage and adjust your premiums as needed.

Protection against market volatility: IUL policies can help offer protection during market downturns by protecting your cash value from losses.

What to know before choosing an IUL product

While IUL can be a valuable tool, it’s not without challenges and risks. Understanding the potential downsides is important:

Fees and costs: IUL policies often come with fee structures, including administrative costs and other charges. Over time, these fees can cut into your cash value growth.

Earning caps: While you benefit from market gains, many policies have a cap on returns. For example, if your policy’s cap is 10% and the market index gains 15%, you’ll only receive the 10%.

The impact of withdrawals: Accessing your cash value can be helpful, but it decreases the amount available for future growth and may reduce your death benefit.

When to consider IUL insurance

IUL insurance could be a good fit for individuals looking for both life insurance protection and long-term cash growth potential. It’s particularly appealing for those who want market-linked growth that limits the risk of losing money when the market dips.

Meet Christina
Christina is a 40-year-old small-business-owner who wants life insurance to protect her family but also sees the value in building tax-efficient cash savings for retirement. With an IUL policy, she can enjoy flexible premiums and the opportunity to grow her savings at a guaranteed minimum rate, all while maintaining the security of a death benefit for her loved ones.

Comparing IUL and VUL insurance

Both IUL and variable universal life (VUL) insurance allow for cash value growth, but there are key differences:

Risk: VUL policies invest directly in stocks, bonds or mutual funds, meaning your cash value can lose money in poor market conditions. IUL, on the other hand, offers downside protection with a guaranteed floor.

Growth potential: VUL has no caps on investment returns, which may lead to higher growth during strong market years. IUL is capped, but the floor provides stability.

Here’s how they compare:

For more information, explore the various types of life insurance.

Speak with a financial professional

Choosing the right life insurance policy doesn’t have to be overwhelming, but it does require careful consideration. Indexed universal life insurance offers a blend of financial growth and protection, but it’s not a one-size-fits-all solution.

Before deciding, consider meeting with a financial professional to explore all your options and ensure that your choice aligns with your long-term financial goals.