Life insurance policies provide beneficiaries with a sum of money after the policy holder’s death in exchange for annual or monthly premiums. Many families obtain and use life insurance as a way of taking care of family members after they pass. The different types of life insurance can be tailored to the policy holder’s needs through adding investment components such as enacting age restrictions or customizing premium payments or death benefits.
An indexed universal life insurance policy is one such policy type that is available to policyholders. In this blog post, we’ll take you through what indexed universal life insurance is and its pros and cons to help you and your family decide if it’s the correct policy for you.
What is Indexed Universal Life Insurance?
Indexed universal life insurance is a type of permanent life insurance, a type of insurance policy that stays active for the duration of the policy holder’s lifetime provided they make the appropriate premium payments. Term life insurance, on the other hand, expires after a set amount of time. Other types of permanent life insurance include universal life insurance, whole life insurance, and variable life insurance.
Permanent life insurance policies have two important components: death benefits and cash value. Cash value refers to the amount of money that can gain value over time. Death benefits refer to the sum of money paid out to beneficiaries after the policy holder’s death.
Indexed universal life insurances policies have a minimum guaranteed interest rate so that you are not likely to lose money over time. However, these interest rates are not fixed and are, instead, based on an index chosen by the insurer. Unlike directly investing in an index fund, policyholders will not lose money when the market is in a downturn. A guarantee is applied to your principal which insures it against any losses. On the other hand, usually, there is a cap on the maximum returns you can see.
If you are trying to decide if a indexed universal life insurance is right for you and your family, we go through some pros and cons of this type of life insurance to help you decide if it’s for you.
The Advantages of Indexed Universal Life Insurance
As stated before, one of the advantages of indexed universal life insurance that makes it enticing for policyholders looking for a life insurance policy is the ability to take advantage of stock market returns without worrying about loss. Some additional great advantages of indexed universal life insurance policies are:
- Tax-free growth
Similar to Roth IRAs, policyholders don’t have to pay taxes on the money withdrawn from the cash value of indexed universal life insurance policies.
At the event of the policy holder’s passing, death benefits are also distributed to beneficiaries tax free.
- Greater flexibility
In addition to tax free growth, indexed universal life insurance policies also give you greater flexibility. With this kind of permanent life insurance, policyholders don’t have to wait until they hit a minimum age for distribution to start taking money out.
Additionally, policyholders also decide how much risk they want to take in the market, adjust death benefits, or choose from a variety of riders to fully customize their policy to their needs.
- Can be used for loans
Depending on the policy, it’s possible to borrow money from an indexed universal life insurance policy without worrying about penalties or taxes. Additionally, unlike other types of life insurance, policyholders do not need to pay back the money taken out.
The Disadvantages of Indexed Universal Life Insurance
In terms of disadvantages of indexed universal life insurance policies, critics have pointed to the fact that, as a permanent life insurance policy, they come with high fees such as administrative and sales fees.
Other downsides to indexed universal life insurance policies are:
- Growth cap
Indexed universal life insurance has a maximum threshold on how much you can make within your plan. Growth caps can also lead to confusion and the index and growth of cash value can lead to more complexity making this policy harder to understand.
Other kinds of life insurance include a guaranteed interest rate with predictable premium payment amounts throughout the life of the policy. Indexed universal life insurance policies’ rates depend on an index and cost of premium payments can change over time.
Selling Your Indexed Universal Life Insurance
Because of the unpredictable nature of indexed universal life insurance, policyholders might find themselves in a situation where premium payments have become much too high to keep up with. Falling behind in premium payments can put you at risk for losing all the money invested into the life insurance policy.
A solution available to indexed universal life insurance owners is to sell their insurance through a life settlement. A life settlement refers to the process in which a policyholder sells their life insurance policy to a third party. The policyholder receives a lump sum of money for their policy and the third party assumes payment of upcoming premiums and receives the policyholder’s death benefits at the time of their passing.
If you are looking to sell your indexed universal life insurance policy, call Harbor Life Settlement today. Our passionate and skilled team will walk you through the process and help you get the most of our life insurance policy. Find out more by contacting our staff today.