Variable Universal Life Insurance Pros And Cons - Whenever the stock market experiences growth momentum, it is difficult for even the most conservative investors to sit out. This trend may explain the rise in something called indexed universal life (IUL) insurance. However, while indexed universal life policies are popular, they are also highly controversial policies.
Like other permanent life insurance products, IULs feature an insurance component as well as cash benefits that the holder can use whenever the need arises. However, there are important differences. Instead of crediting policyholder accounts based on conservative bond funds, insurers link them to a stock index such as the S&P 500.
Variable Universal Life Insurance Pros And Cons
Some financial experts urge investors to avoid more expensive whole life policies altogether, abandoning the old adage of "buy the term and invest the rest." With IUL, however, debate can be heated, particularly over some of its sales practices, with critics arguing that most consumers should stay away from them. Here, we discuss IUL and why it is a hot topic.
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One of the main selling points for indexed universal life is that it gives policyholders exposure to the stock market while protecting against losses. If the underlying stock market index rises in a given year, owners will see a proportional increase in their account.
The word "proportion" is important here. Insurers use a formula to determine the amount to credit your cash balance, and, while the formula is tied to index performance, the credit amount is almost always lower. If the market goes up by 10% in a year, your cash might only go up by, say, 7% or 8%.
There is also a limit on the amount of credit, which limits the growth of your account if the stock has a banner year. This limit is an annual limit on account credit which can range from 10-14%. So, even if a benchmark like the S&P 500 goes up 20%, your profit may be only a fraction of that amount.
For some consumers, this may be the price they are willing to pay to reduce their downside risk when the market moves in another direction. Many IUL policies have a guaranteed minimum credit rate of 0%, which means—hypothetically, anyway—that your account won't lose value if stocks suddenly drop.
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However, prospective policyholders also need to consider the notoriously high costs, including administration fees and surrender charges, associated with permanent life insurance. The commissions paid to sales representatives are very high, possibly swallowing the entire first year of premiums. From there, sales fees continued to increase at around 5% per year before closing. As a result, your account cash balance may not begin to show significant growth for years.
Sales representatives often sell term policies that offer a death benefit without a cash component. This is one reason why some agents are more inclined to reject universal life policies.
Another factor to consider when it comes to IUL policies is the complexity of the contract you are signing. What many investors don't realize is that they often include provisions that allow insurers to change the rules of the game later on. For example, some policies allow companies to reduce production limits to strengthen their balance sheets.
According to some critics, getting a sales promotion to get customers interested in a product can be just as confusing. Sales representatives sometimes use examples that show how much a policyholder could potentially earn under certain market conditions. But the industry has come under fire for over-reliance on bright plans that almost never happen.
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So is anyone better off with an indexed universal life policy? There's an argument for having one if you're a high-net-worth individual and don't want your family to face a huge tax bill after your death. Irrevocable life insurance trusts have long been a popular tax shelter for such individuals. If you fall into this category, you may want to speak with a fee-only financial advisor to discuss whether purchasing insurance remains a good fit for your overall strategy.
However, for almost everyone, it's hard to find a compelling reason to choose an IUL over term insurance, especially if you haven't maxed out your retirement account.
IRAs and 401(k) are retirement savings accounts. Money is deposited into an account, either pre-tax or after-tax, and invested to build a retirement nest egg. Earnings are deposited tax-free in some types of 401(k)s and IRAs, although taxes are paid when the money is withdrawn.
Regardless of whether you believe in this particular insurance product, it's almost always a good idea to max out your 401(k) and IRA before putting any money into an IUL policy.
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Retirement savings accounts sometimes come with matching contributions from participating employers. Compared to the high fees of IUL accounts, 401(k)s and IRAs with no-load funds, and typical annual expense rates of around 1.5%, are starting to look like much cheaper alternatives than IULs. A retirement plan may have several investment options. There are also lower fees because fees are negotiated by large corporate sponsors who represent many participants.
Investment income doesn't come with a cap, though there's no guaranteed floor, either. Smart investing with properly diversified assets, however, can significantly reduce the risk involved.
For most people, saving for retirement, buying a low-cost term life policy and investing the rest in a 401(k) or IRA is a smart move. In most cases, you will have a very small payment to eat on your return. Plus, you don't have to worry about the fine print in the IUL agreement.
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Variable Life Vs. Variable Universal: What's The Difference?
By clicking "Accept All Cookies", you agree to store cookies on your device to improve site navigation, analyze site usage and assist in our marketing efforts. Variable universal life insurance, or VUL, is a cash value life insurance policy. . It offers a unique set of features including investment and death benefits. Consumers are allowed to change their policies as their life circumstances change, while still being able to build wealth and provide financial security for their families.
VUL policies are usually designed to include subaccounts. They work like mutual funds and allow policyholders to gain exposure to bonds or stocks. This allows the policy to provide a better rate of return when compared to permanent insurance or a standard universal policy.
Here are the pros and cons to consider if you're looking at a variable universal life insurance policy today.
Let's say your policy is $60 a month. You must pay $60 per month to get the coverage you want. Now let's say you have an extra $60 that you also send in each month. The rest of the block of cash goes into your cash value account, which works like a Roth IRA. Because this creates cash value, it can eliminate the need to pay insurance premiums in the future. There are also tax benefits for overfunding that may apply to some users.
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In the United States, the cash value investment portion of a VUL policy is tax-deferred. Any death benefit paid from the policy is also tax-deferred. This means that the government will leave the heir alone if the payment is made. The only real downside to this is that if someone takes out a loan against their cash account, the funds are considered a loan and that means interest is paid on the amount.
With a VUL policy, you still get permanent coverage for the rest of your life. Your policy cannot be canceled until you make your monthly payments. This means you don't have to worry about annual medical checkups or losing your coverage because something unexpected happens to you.
You stay in control of your financial future by using a VUL policy. Insurance companies should provide a variety of investment strategy options for the cash accumulation portion of the policy. Three common options are a simple interest account, a guaranteed annuity or an equity index strategy.
Your financial picture may change over time. You can earn more, or you can earn less. Your policy can be adjusted so you can pay a higher premium when times are good, then pay a lower premium when you need a little extra income. You can also make changes to your premium when you suspect that the market is performing well or poorly. That way, you can build wealth with whatever interest credit strategy works best for you.
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If there is a month or two where you are short on cash and unable to pay your premiums, then the cash portion of your policy
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