Indexed Universal Life insurance (IUL) policies are relatively new. As their name implies, their earnings potential is tied to an equity index. This gives the IUL cash accumulations the potential to earn higher returns if the market performs well. The potential for higher returns than traditional whole life insurance guaranteed cash value accumulations is because the credited interest is based on the performance of an equity index, such as the S&P 500.
IUL policies give policyholders the option to allocate all or a portion of their net premiums (after paying for the insurance coverage and expenses) to a cash account. This account credits interest based on the performance of an underlying index with a floor of 0% return and a cap rate or participation cap on the return.1 The floor of 0% cannot be emphasized enough because it is the foundation of stability of the cash value accumulation (your capital) that is protected from losses. Thus, when the index is down the guaranteed cash accumulations deposited on the anniversary are additions to the amount at the beginning of the deposit period. Essentially the floor prevents the need to catch up/recover from losses of cash accumulation just to get back to where the accumulations were before the losses occurred.
The zero (0%) floor is a valuable feature that provides another compelling feature to consider the use of IULs, but another feature adds to the positives. The IUL life insurance policy is somewhat like a retirement-income vehicle because a portion of the premium is placed for growth that pay an interest rate that matches that of an equity index. This provides a vehicle with greater upside potential and tax advantages that extend beyond the most common features of tax-deferred accumulation to the leverage that is uniquely a feature of Cash Accumulation Life Insurance. That is that IRS regulations allow for tax-free distributions of the cash value that can be used as needed. Yet another feature of IULs via the IRS Section 1035 regulation allow for the tax-free exchange of older nonperforming policy for another without triggering.
Another lever that is as compelling to consider is that provides stability and flexibility for unforeseen circumstances of life. Consider the use of cash value accumulations to provide a protective buffer for liquidity in the form of tax-free funds when equity markets are in catastrophic downturns or other assets are depressed.
The evolution of today’s life insurance can provide the flexibility to use the policy’s some death benefits in case you are diagnosed by a physician to have experienced catastrophic health events such as a Stroke, Heart Attack, Coronary By-pass, Cancer or other conditions of Terminal, Chronic, or Critical Illnesses. This is the Accelerated Death Benefits (ADB) feature and not all policies have the ADB feature.