What is an Indexed Universal Life Policy (or IUL) Account?
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Indexed Universal Life Policies, sometimes referred to as an IUL Account, is a type of life insurance policy that provides permanent protection rather than limited term protection. An IUL policy has two components:
The first component, a guaranteed death benefit, pays out to the beneficiaries when the insured dies and is commonly referred to as the death benefit of a policy. But the second component is a cash value, or living benefits. This means that this type of insurance policy has benefits that the insured person may take advantage of while still alive.
One such benefit is to use an IUL as a retirement savings vehicle. The interest rate provided by an insurance policy is almost always higher than the interest rate from a standard bank savings account. These IUL policies can accumulate cash value as you continue to pay your premiums. The more premiums you pay, the more the cash value accumulates .. plus, the interest compounds.
IULs are very liquid investments as well. Pretend that you are a real estate investor for a moment. If you were flipping a house but then a tornado comes through (I'm being dramatic) and you suddenly need $20,000 to replace the roof, what are your options currently?
You could take out a loan against the value of the house, but if you default on the loan, you may lose the house entirely plus all your investment as well.
However, if you manage your investment budgets through life insurance policies like an IUL and you borrow the $20,000 from your cash value, then the worst that can happen is you lose your insurance policy... But no one is coming after the house.
Another terrific use of the living benefits in an IUL account is as retirement income. You can stop paying into the policy and draw an income from the policy until there is no more cash value. IULs offer a lot of flexibility.
You might ask what the difference is between a Whole Life policy and an IUL policy. Well, let's start with a Whole Life policy first. A Whole Life Policy consistently grows at the same interest rate under various market conditions. An IUL account earns interest based on a market index like the S&P 500.
The IUL is not actually invested in the market index it mirrors. So, for example, you may have an IUL account that mirrors the S&P 500 market index. On one hand, the IUL account will have a cap on the amount of interest it can make. Anything over this cap is profit to the carrier. On the other hand, the IUL account also has a 0% floor. So, there is no possibility of losing money in the market.
So, let's pretend there is a cap of 10% on your IUL account. If the S&P has gains of 15%, you earn 10% that period in your IUL account, because that is your cap. But what if the S&P goes down -8% the following period? Well, you do NOT lose any money because of the 0% floor protection. This is why you will hear that an IUL gets all the gains without any of the losses.
IULs are great as a savings vehicle, as well as ensuring that you leave a death benefit to your beneficiaries.
Learn more about the pros and cons of IUL accounts versus other types of retirement accounts.
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