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What better way to give you peace of mind than an IUL policy when the market goes bad? Any stock market crash is a good example of why universal life insurance is an excellent tool for building and protecting wealth, all wrapped up in a tax-advantaged vehicle.
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In this article, we discuss the pros and cons of indexed universal life (IUL), focusing on the pros and cons of an insurance product that seems to polarize both the insurance and financial industries.
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Over the years, agents of all life have been busy with a lot of energy, preventing any possible direction from this product.
However, the options available to consumers in the IUL market are not available from other leading life insurance companies.
On September 1, 2015, NAIC Original Standard 49 (AKA “AG 49”) went into effect. In particular, AG 49 requires the description of IUL insurance policies to be based on general production accounting, which means that cash value increases are more conservative when the IUL figure is created using the pre-AG49 index. .
We think this is a good thing for consumers because it provides a more conservative view of what a policyholder can expect from an indexed universal life insurance policy.
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So with that behind us, let’s take a moment to bring to your attention some of the best listed global life insurance companies.
For more information about these top IUL insurance companies, including information on recommended IUL policies, click on the insurance company names above to access our respective Index Universal Life Insurance Company Rankings.
An IUL policy is a type of universal life insurance. Like universal life, you can do this with indexed life insurance
IUL is a cash value life insurance policy. The policy earns interest in a fixed account or a checking account, which increases your premium, increases the cash value and growth of your policy.
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Both fixed account and indexed account have a floor, which is the guaranteed minimum interest that you will earn in a particular account. A typical bottom line for a fixed account is between 2-3%. The down payment for a listed account is usually 0%.
A structured account tracks major stock indices such as the DJIA, S&P 500, NASDAQ 100, Russell 2000, Hang Seng, EURO STOXX 50 or MSCI Emerging Markets.
It is important to understand that your cash value is not invested in sub-accounts, it is more variable life insurance. This is one of the main differences between VUL and IUL insurance.
Instead, it pays interest based on the performance of the deposit index, depending on the cash limit and the rate of participation in the indexed account.
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The participation percentage is used to determine how much of your cash value participates in the performance of the index being tracked.
For example, if the participation is 100%, then your cash value will be credited with interest up to the total profit related to the limit in the index. If the participation rate is 85%, your cash value will be credited with interest up to 85% of the total interest in the index as per the limit.
The limit is the maximum amount of interest for that portion that the insurer will credit to your checking account. Capping rates vary by account type and credit methods.
You will find that different life insurance companies offer different cap rates and subscription rates depending on the IUL policy and the selected index.
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Your limits can vary significantly from one insurance company to another. Some companies offer unlimited capacity but subscription rates are low. In contrast, other IUL companies offer a 100% participation rate, but with limits ranging from 9% to 17%.
That’s why it’s important to understand the different types of life insurance policies and how they affect the performance of your policy.
More on all of this below. Hope the above information is enough to move on to the next section.
Before we get into our IUL pros and cons, let’s talk briefly about whole life and indexed universal life.
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While life insurance is the best savings account option, an IUL certainly has a place in a solid financial plan.
Whole life insurance is an uncorrelated asset, which means it does not follow the movements of the stock market.
Index Universal Life, on the other hand, tracks the stock market as it is indexed to a specific industry index, such as the S&P 500 or NASDAQ 100.
Whole life insurance offers certain guarantees such as death benefit, guaranteed cash value growth and guaranteed premium rate.
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Indexed universal life does not offer such guarantees because its performance is largely dependent on the stock index it tracks.
A term policy that pays dividends pays dividends annually. Contributions can be used to purchase additional non-subsidized insurance policies, increasing the death benefit and increasing the cash value of the policy.
The IUL policy is credited at a rate of interest determined by the rate or contribution rate from the insurer and the maximum rate of principal index followed by the indexed account.
Deciding which strategy is right for you depends on many factors, especially how you answer the question:
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Hopefully the following article on the pros and cons of universal life will shed some light on which permanent life insurance policy is best for you based on your specific needs and goals.
In this section, we cover the top 8 benefits of indexed universal life insurance, starting with the most obvious, the death benefit.
It is an insurance product and ultimately what you are insuring (your life) is very important.
Money can never replace the loss of a loved one, but it is important to avoid the double whammy of a family death and major financial problems.
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All life insurance products have a death benefit, so it may seem strange to argue like a pro, but at the end of the day, this is the most important product purchased, so it should be avoided.
An IUL is a cash value life insurance policy, meaning it has a cash value and allows for cash growth in the policy.
This is another advantage of term life versus perpetual life and the reason why IULs are more expensive than term, at least initially.
The cash value increases over time as the individual pays into the IUL policy. Cash value is always available and can be used at your discretion to buy things like real estate or stocks.
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Additionally, withdrawals are tax-free income, up to the amount of premiums paid, because premiums are paid in after-tax dollars.
And don’t forget, you can access your account growth tax-free by taking out a life insurance loan (sometimes called a swap loan) against your cash value.
The cash value can be used to help pay long-term care costs. In addition, some IUL policies offer long-term care insurance for motorists.
As the costs associated with long-term care continue to rise, a hybrid policy may be the best option.
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For those who have more money to invest each year, there is a limit on the amount you can put into the policy (usually a percentage of the total policy value), a limit called the MEC (Modified Contract) limit. known as .
With variable term life insurance, you pay your premium every month, and if you stop paying, your policy expires. There are some exceptions, but it is very strong.
With an indexed universal life policy, you may pay more or less each month (depending on the minimum expenses and maximum MEC), but the policy has more premium flexibility than other types of life insurance on the market.
If you work at a job and some times of the year are better than others, you may want to consider flexible premium options with an IUL policy.
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Instead, a life insurance company buys options on a market index, which provides the opportunity to make money when the stock market goes up and not lose it when the market goes down.
Of course, the company still loses the “option cost”, but it is part of the insurance cost each year and is a fixed cost.
In other words, the cost is known in advance so the insurance company can estimate accordingly.
An annual reset might not seem like much at first, but it’s actually a big deal.
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This means that every year you always start from scratch. You never struggle to “catch up” because of past hurts.
Over a 79-year period (1937-2015), the S&P 500 had two consecutive losing streaks of three years, 1939-1941 and 2000-2002. It had only one losing streak in two consecutive years in 1973-1974. And after these obvious losses,