Indexed Universal Life
Indexed universal life insurance is a cash value life insurance that provides a death benefit that pays out to your beneficiaries, or a cash value that can be accessed during the living years of the policy. As you pay your premiums the policy has the potential to build cash value which can be accessed in the form of a loan or a withdrawal. What makes it different than other permanent policies is that the interest rates credited to the policy’s cash value can be based on the performance of an indexed account such as the S&P 500.
An IUL is like a combination of an investment and an interest-based savings account. You can either withdraw the money or take a loan against the policy at any time there is an amount inside the cash value account. Certain insurance companies issue a withdrawal fee and interest schedule for loans.
The accumulation value is based on a crediting strategy which is calculated using an annual Point-to-Point Crediting Strategy, which compares the start and end date values of each index over a one-year period. If the outcome is favorable, excess index interest can be credited to your account value. If the outcome is bad, the guaranteed floor will protect the value of your account. The majority of insurance companies have an index interest crediting of a 0% floor, which means that in the event of a negative index percentage change, 0% is the minimum crediting rate. The accumulation value is not actually invested in the stock market, despite the fact that the index interest rate is based on the performance of the S&P 500®. Only the index interest credited to the policy is calculated using the index performance.
Calculating the index values on the segment end date, deducting the index value from the segment start date, and dividing by the index values on the segment start date yields the index change percentage.
Tax Deferred Earnings
Contracts for life insurance comply with specific IRS standards, allowing money added to the policy value to grow tax-deferred. Gains in the value of the policy are not subject to tax during the years they are earned or while the policy is still in effect. Until the policy is surrendered, expires, or when specific disbursements take place, taxes are postponed. IRC Section 72 You have a greater chance of accumulating policy value thanks to this tax advantage.
Federal Income Tax-Free Death Benefit
Beneficiaries get life insurance proceeds that are not subject to federal income tax under the IRS code
101(a) of the IRC (1). Within a policy, transfers between accounts are made tax-free.
Your earnings are protected from the effects of current taxes through tax-free transfers.
Provides tax-free savings or retirement when you take a loan against the policy.
You do not incur a capital gain tax on or upon the withdrawal of your cash value if it exceeds the dollar amount of premiums put in.
Has protection against losses where the market floor will always be 0%, meaning you will never lose your money.
Riders, such as critical illness or terminal illness riders, allow you to take up to a percentage, based on the insurance carrier, of the coverage amount to use on medical bills.
Your cash accumulation is subject to a cap rate based on the insurance carrier. Your interest credit cannot exceed that cap rate.
Depending on the company, fees may be higher on some policies than others.