Indexed universal life insurance (IUL) is a type of permanent life insurance. It covers you for your entire life and it builds cash value the longer you keep the policy in force. The benefit is that IUL gives you ultimate flexibility, allowing you to change your level of coverage, your payment amount, and how often you make that payment. You also have the chance to tie your cash value growth to an equity index, but you're guaranteed not to lose any money by doing so.
Indexed universal life is designed specifically to offer you all the good things about a whole life insurance policy with even more flexibility. Just like a whole life policy, you get:
- lifetime coverage
- guaranteed minimum interest
- possible dividends
But unlike whole life insurance, you get to pick the timing and amount of your payments, which gives you a ton of financial flexibility as you juggle other investments and life commitments. Your policy can earn even more interest if the policy issuer's investments perform well. Even better, if the market has a downturn, your cash value isn't subject to loss.
How Does It Work?
When you buy an IUL policy, you have the chance to earn more than the standard rate of interest offered by your insurer. You earn that interest based on the performance of the equity index your account is tied to, such as the S&P 500 or the Dow Jones. Most IUL policies provide a minimum interest credited to your cash value even if the index loses money.
If the index makes gains over time, a percentage of that gain is credited to your cash value account. The percentage of gain you get is called the "participation rate." Ideally, you want a participation rate of 100% for the duration of your policy. This means you get every cent of interest gained by the rise in the index.
Example: If the index you're tied to gains 20% during a particular index term and your policy's participation rate is 90%, you get 18% of that gain (20% x .90).
Note: Some insurers will place a cap on the amount of gains they'll add to your cash value account. If your cap is 12%, in the example above, you'd end up with 12% instead of 18%.
Can I Use My Cash Value?
Yes, you can! In most cases, your cash value grows tax-deferred, which means you don't have to pay income tax on money that's credited to your account.
You can take tax-free withdrawals up to your policy basis (the total amount of premium you've paid so far). If you need more than what's already in your cash value account, you can take a policy loan against the cash value. Just be aware that cash withdrawals and policy loans may reduce the policy's death benefit. I wouldn't recommend borrowing so much that your death benefit decreases, since the goal of the policy is to pass that death benefit to your loved ones if anything happens to you. Overall, cash value is a fantastic way to supplement your retirement, pay off bills, send a child to college, and more.