Understanding the Mechanics of an Indexed Universal Life Policy
Indexed Universal Life (IUL) insurance is a type of permanent life insurance that combines the benefits of a traditional universal life policy with the potential for higher returns based on the performance of a stock market index, such as the S&P 500. An IUL policy builds cash value over time, providing policyholders with a source of tax-deferred savings that can be used for a variety of financial goals, such as paying for education, supplementing retirement income, or leaving a legacy for their beneficiaries.
How does an IUL policy build cash value?
An IUL policy builds cash value through a combination of premium payments, interest credits, and a policy’s death benefit. Premiums paid into an IUL policy are allocated to both the death benefit and the cash value component. The cash value component earns interest that is credited to the policy each year, based on the performance of a selected index, such as the S&P 500.
How interest credits work in an IUL policy
Interest credits in an IUL policy are determined by the performance of a stock market index, such as the S&P 500. The policyholder can choose to have their cash value component linked to a specific index, such as the S&P 500. The interest credited to the policy is based on a percentage of the index’s performance, up to a specified cap.
For example, if the S&P 500 rises by 10% in a given year and the policyholder’s IUL policy has a cap rate of 6%, the policyholder’s cash value component would earn a 6% interest credit for that year. If the S&P 500 does not perform well, the policyholder’s cash value component may earn a lesser interest credit or none at all, but it will not lose value. This protects the policyholder’s cash value from market downturns and provides a degree of stability in their savings.
Accessing the cash value in an IUL policy
The cash value in an IUL policy can be accessed tax-free through policy loans or withdrawals. Policy loans taken against the cash value do not reduce the death benefit and do not have to be repaid, as long as the policy remains in force. Withdrawals taken from the cash value may reduce the death benefit and may be subject to taxes, depending on the policyholder’s specific circumstances.
In conclusion, an IUL policy provides policyholders with a flexible and tax-efficient way to build and access savings for their future financial goals. The potential for higher returns based on the performance of a stock market index, combined with the stability of a permanent life insurance policy, make an IUL policy a valuable tool for building long-term wealth.