WHAT IS AN IUL, AND HOW DOES IT WORK?
The way interest is credited to an IUL policy provides the upside potential for a higher return without the downside risk. For example, in years where the underlying index performs positively, your account will be credited with that return, up to a particular “cap.”
So, for example, if your policy has a cap of 12%, and the underlying index has a return of 13% in a given year, your cash value would be credited with 12%. However, in years where the underlying index performs negatively (when other types of accounts are losing money), your cash value account will simply be credited with a 0% return, therefore protecting your cash value and allowing you to continue building your cash value, without having to make up for any losses.
The funds that are inside of your cash value account are also allowed to grow on a tax-deferred basis. This means that there are no taxes due unless or until the money is withdrawn. This provides your cash value account with the ability to grow and compound over time. You have the option to take the cash value as a tax-free income at any age.
One of the most significant benefits of an IUL policy is the Death Benefit. An IUL is an insurance product that lets holders insure the ultimate asset: your life. Losing a loved one leaves a void that money can never fill. Dealing with the death of a loved one with the addition of financial hardship caused by loss of income, funeral expenses, etc. can worsen the effect on your family’s mental and financial health.
Insurance companies have designed a way for you to be able to access your cash value, tax free. The IUL cash value may be taken as a tax-free income using the Policy Loan Provision.
NO AGE OR INCOME REQUIREMENT/ COLLEGE FUNDING
Unlike tax-qualified plans, such as an IRA, life insurance has no minimum age that an individual must attain to put this strategy into action. Nor does an individual need to have earned income in order to contribute.
For example, you can purchase a policy for your children in order to save for college or to give them a head start in life. The results can be stunning because it enables you to add 20 plus years of tax-deferred growth to the IUL cash value.
TAX DEFERRED GROWTH
It’s very important to understand that IUL policy cash values grow tax-deferred, not tax free. In other words, if you were to simply withdraw all of your funds, or cancel the policy, especially in the later years, then all of the gain (the amount above what you started with) would be subject to income tax but not capital gains tax.
NO TAXATION OF SOCIAL SECURITY BENEFITS
What many people don’t know is that a percentage of their social security benefits can now be taxed as income when received. All money that comes from a tax-qualified plan (401k, 457, SEP, SIMPLE, IRA etc.) during retirement will be combined with their Social Security income and taxed as such. However, income from an IUL policy, whether it be via withdrawal or loan, does not subject an individual’s social security income to be taxed. This can increase your retirement income.
Chronic Illness, Terminal Illness, Critical Illness and Critical Injury Rider
Under certain qualifying events, an IUL policy allows you to pull cash from the death benefit of the policy without any penalty. Such instances would include diagnosis of a terminal illness that would result in death within a 12 -24-month period depending on the state; the inability to perform two out of the six “activities of daily living” for a period of at least 90 consecutive days without assistance, or that you are generally cognitively impaired; or the diagnosis of certain critical illnesses.
UPSIDE GROWTH POTENTIAL WITH DOWNSIDE PROTECTION
This is one of the most incredible features of the IUL. The IUL policy contractually guarantees that your cash value will never have a negative return due to market losses.
NO MANDATORY DISTRIBUTION REQUIREMENTS (”RMDS”)
One of the many problems of saving money in a tax-qualified plan like an IRA or 401(k), is that, not long after you turn 70, you are forced to begin to liquidate the account whether you need the money or not. The government does not get paid (taxes) unless you start withdrawing money. So, it forces you to begin withdrawals at 70 in order to get their hands on the portion of your retirement account that is essentially owed the tax.
The IUL, however does not come with this burden. You have control and you get to decide how and when you would like to use your money, not Uncle Sam.
Because an IUL policy is a contract that has a named beneficiary, the death benefit is paid directly to the beneficiary within days of the death. It does not get tied up in probate or other legal issues. It provides quick, simple, easy and immediate cash benefit to the beneficiary.
WHAT ARE LIVING BENEFITS?
The obvious value of life insurance is the death benefit it provides. With an IUL, you get the death benefit PLUS the cash value benefit. These features are often the tip of the iceberg. Since everyone has unique goals, you no longer have to settle for just a simple one-size-fits-all life insurance policy. An IUL can do more than pay a death benefit and provide cash value, it can also help you and your family in a time of need such as the qualifying events listed below.
POTENTIAL QUALIFYING EVENTS
If you have been diagnosed with a terminal illness that will result in death within 24 months (12 months in some states) of certification of the illness by a physician.
A physician has certified, within the past 12 months, that you are unable to perform two out of six “activities of daily living” for a period of at least 90 days without assistance.
Critical Illness includes:
- ALS (Lou Gehrig’s disease)
- Aorta Graft Surgery
- Aplastic Anemia
- Cystic Fibrosis
- End Stage Renal Failure
- Heart Attack
- Heart Valve Replacement
- Major Organ Transplant
- Motor Neuron Disease
- Sudden Cardiac Arrest
Critical Injury includes:
- Severe Burns
- Traumatic Brain Injury
LIVING BENEFITS COULD
BE USED FOR, BUT ARE
NOT LIMITED TO:
- Household Expenses
- Home Modifications
- Nursing Home Care
- Adult Day Care
- Regular Bills
- Quality of Life Expenses
- Lifelong Dream Vacation
EXAMPLES OF LIVING BENEFITS
USED IN REAL LIFE
Here is a Hypothetical Example:
John is a 40-year-old married father of three. He protected himself, his retirement, and his family with, simply, one IUL policy that included Living Benefits. A recent car accident left him certified as permanently chronically ill. John received a lump-sum cash advance from the death benefit of the IUL policy and used it to modify his home to make it wheelchair accessible to improve the quality and ease of his life.
Jane was diagnosed with terminally ill metastatic breast cancer and was given less than 24 months to live. Bora Bora was always on her bucket list. She was able to receive a lump-sum cash advance from the death benefit of the IUL policy and take her family on that life long trip. They made memories that are priceless.
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