“Are they the only ones they’re claiming?” What is an IUL? What do advisors think about an IUL?

answer: This is a question recently asked by a reader. So I decided to ask my advisor what the deal with these policies is like and who it makes sense for. According to her Felicia Gopaul, a certified financial planner at CSP Financial Group, insurance often gets a bad rap from both consumers and her financial advisors. But she adds that it’s not always worth it. That said, these life insurance vehicles are certainly not for everyone and there are risks.

What are IULs?

Indexed universal life insurance is a type of so-called whole life insurance. In addition to having your loved one receive a death benefit when you pass away, you can also build cash value as part of the funds are invested. Grow stock market indices and usually tax deferrals.

Here’s how it works: When you pay the premium, part of it will be used to cover your death benefit and part will be used for cash accounts that are invested in stock market indices.

They offer flexibility and tax-free profits, but returns are capped and there are no guarantees on premium amounts or market returns. Also, IUL insurance is not without risk. Unlike fixed universal life insurance, there is no guaranteed rate of return. However, it is generally less risky than variable universal life insurance, which allows policyholders to invest directly in mutual funds and other securities.

What Advisors Think About IUL

Grace Jung, certified financial planner and managing director at Midtown Financial Group, said they could be used as an alternative to Ross IRAs. Often these policies are used for death benefits, but if designed properly they can build cash value for future tax-free withdrawals. These policies are also used as an alternative to the Roth IRA for individuals who cannot contribute directly to the Roth IRA, and as an alternative to college planning. ”

By way of background, these policies are usually overfunded, meaning the added premiums are higher than needed to maintain the death benefit, Yung said. “Extra cash is invested in a growth index with a lower floor for protection. This is ideal for individuals who want some downside protection in their cash value. After that, you could accumulate significant cash value for tax-exempt supplemental retirement income purposes,” says Yung.

According to Elliot Dole, a certified financial planner at Buckingham Strategic Wealth, those considering an IUL are presented with policy predictions that may materialize but may not produce the desired outcome. often “We cannot predict the magnitude of the deviation, but the values ​​shown are only predictions. It suggests that it’s not as good as it gets, but of course we can’t be sure of that until we see actual results.

Some IUL policies also represent a significantly higher risk than most buyers will admit. That said, the question for many now and for the rest of their lives is whether they have the necessary risk tolerance to concentrate large sums of money on a single policy. “If a policy does not achieve its predicted performance, premium payments far in excess of the original forecasted upfront funds to ensure that the policy will generate future cash flows and remain in force until death. Of course, higher premiums than expected would reduce the likely internal rate of return implied in the proposal,” says Dole.

This policy is also flexible for post-retirement bear markets. If the market recedes, you can earn income from life insurance policies instead of liquidating your portfolio for retirement income when the going gets tough. “This will help the nest eggs last longer after retirement,” he says, Yung.

Gopaul says most people try to get the maximum amount of insurance for the minimum amount. “Properly funded and structured insurance can be used for all sorts of purposes. is the current owner, but plans to transfer ownership in the future when his nieces and nephews grow up. We let our customers use the cash value as a down payment for property purchases,” says Gopaul.

In addition, some of these policies can have long-term care (LTC) riders attached. “Traditional LTC policies are expensive, so adding an LTC rider to the IUL policy allows individuals to get LTC coverage without going the traditional route,” Yung said.

To avoid negative tax consequences, Yung recommends contacting a certified financial planner with experience designing life insurance. “If the cash value is exhausted, the policy expires, so withdrawals must be properly managed to avoid exhausting the cash value. happens,” he says Yung.

Additionally, these are long-term strategies that take many years to accumulate significant cash value. As such, the IUL is ideal for individuals wishing to build a bucket of tax-free income for the future, those who are not eligible to directly fund a Roth IRA, those planning for their young children’s higher education needs, and high income earners. . and business owner.