Pros and Cons of Indexed Universal Life Insurance
Equity Indexed Universal Life insurance, or EIUL, is a type of permanent life insurance. It provides a permanent death benefit, provided you keep the policy in force through paying premiums. It is also a form of cash value life insurance -- the policy includes a reserve fund designed to help offset premiums later in life, when mortality charges may become unaffordable for most individuals.
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How EIUL Works
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EIUL policies feature a flexible premium and a cash value side fund. When you pay premiums into the policy, the insurance company invests the premiums in the general account of the insurance company. The insurance company, in turn, invests the general account in the general stock market, largely using options. The policy owner receives a guaranteed credit rating, often comparable to a certificate of deposit. If stocks do well, the policy owner also gets credited a portion of stock market returns. If stocks fall, however, the policy owner still gets the minimum credit rating.
Taxation of EIUL
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EIUL policies are life insurance policies, which have generally received favorable tax treatment from Congress. There is no tax deduction on premiums paid. But the cash value of the policy grows tax free, and the policy owner can generally access the cash value of the policy tax free at any time, provided the policy remains in force. Since there is no income tax or capital gains tax on the proceeds of withdrawals or loans against in force policies, and since there is no 10 percent penalty on proceeds received prior to age 59 1/2, EIUL policies have become popular savings vehicles for some individuals, especially those who earn too much to qualify for retirement accounts, such as IRAs or 401ks, or who have maximized allowable contributions.
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Advantages
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Equity indexed universal life policies have favorable tax treatment, no restrictions on what the cash value can be used for, and provide a tax-free cash death benefit for the policy beneficiary in the event of the death of the insured. Additionally, the cash value in an EIUL policy generally receives some creditor protection, depending on the state, and does not count against the family for the purposes of determining need-based financial aid for college. Finally, EIUL policies do provide some safety of capital, because the policy owner is guaranteed a minimum crediting rating. However, policy premiums are frequently higher than the guaranteed rate, especially on low-balance cash values.
Disadvantages
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EIUL policies can have a relatively high fee structure compared with competing savings vehicles. Commissions are front-loaded, so it can take years before the cash surrender value of the policy catches up with the accumulated premiums paid into the policy. Unless the policy is aggressively funded, the cash value is frequently insufficient to keep the policy in force later in life, and many times retirees are faced with the unpleasant choice of letting a policy lapse or paying amounts of premium to keep the policy alive. Finally, the crediting methods the companies use to calculate the policy owner's share of stock market returns frequently lead to disappointing results. Caps on returns are generally lower than the historic performance of the stock market. The company keeps the rest.
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References
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Comments
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When an insurance professional structures an IUL properly, writes it with the right companies, and informs their clients that these are long term investments, the fees charged and the rate of return produced within the policies will usually perform better than the actual indexes themselves, with an 8-9% return that is tax free. However, the writer of this article is correct in that if you write an IUL with a company who manages their money with greater overhead, and has a less than stellar record investing the money, the disadvantages are accurate. Find an agent who knows how to structure these and write them with Life insurance companies who are great money managers and you will be very happy in the long run.
