How Does an Indexed Universal Life Policy Build Cash Value?
Life insurance is an important aspect of financial planning, providing financial security to your loved ones in case of your unexpected death. One of the most popular types of life insurance is Indexed Universal Life (IUL) policy, which offers not only death benefit protection, but also a tax-advantaged savings component. This policy provides the policyholder with an opportunity to build cash value that can be used later on in life for various needs such as paying off debt, funding college education, or even supplementing retirement income. But how exactly does an IUL policy build cash value?
Understanding Indexed Universal Life Policy
IUL policies are a type of permanent life insurance that offers death benefit protection for the life of the policyholder. In addition to the death benefit, IUL policies also offer a cash value component that grows based on the performance of a stock market index, such as the S&P 500. This means that the policyholder’s cash value will increase based on the performance of the stock market index, but will not decrease if the market experiences a downturn. The policyholder’s cash value is credited with a portion of the index’s annual gains and is protected from market losses.
Building Cash Value Through Premium Payments
One way an IUL policy builds cash value is through premium payments. Every time a premium payment is made, a portion of the premium is allocated to the policy’s death benefit, while the rest is allocated to the cash value component. This cash value component earns interest, which is credited based on the performance of the stock market index. As the cash value grows, the policyholder can access it through policy loans, which are tax-free and do not impact the death benefit.
Building Cash Value Through Dividends
Another way an IUL policy builds cash value is through dividends. Many IUL policies offer the option of participating in dividends, which are a portion of the insurance company’s profits that are distributed back to policyholders. Dividends can be used to purchase additional coverage, to increase the cash value, or to reduce the premium payment. This provides an additional source of growth for the policyholder’s cash value, in addition to the interest credited from the premium payments and the index’s performance.
Building Cash Value Through Policy Loan Interest
Policy loan interest is another factor that can contribute to the growth of an IUL policy‘s cash value. When a policyholder takes out a loan against their policy, they are required to pay interest on the loan. This interest is paid into the policy, increasing the cash value. This can provide a double benefit to the policyholder, as they can access the loan funds when they need them, while also building their cash value through the interest paid on the loan.
In conclusion, an IUL policy builds cash value through premium payments, dividends, and policy loan interest. The cash value component of an IUL policy provides policyholders with a tax-advantaged savings vehicle, which can be used to meet various financial needs throughout their life. If you are considering an IUL policy, it is important to understand how it builds cash value, as well as its potential benefits and drawbacks.