What The Hell’s An IUL?
A week ago, I wrote about maxing out our IUL Accounts. The most popular question I have gotten is, “What’s an IUL?’ Well, sit down kiddos cause we’re going to learn today. 🙂
IUL stands for Index Universal Life. It is a type of universal life insurance, but instead of growing on a fixed interest rate, it is tied to the performance of a stock market index, ie: the S&P 500. It is a permanent policy which means it has a cash value and guarantees payout upon death. The cash value goes up as your premiums are paid and you are able to change payments and premiums provided that you are above the minimum for your policy.
What are the Pros?
There are quite a few pros with the IUL accounts. Here are a few:
- Tax Free Growth: In this it is similar to a Roth-IRA, where you don’t pay any taxes on the funds that you will withdraw from it.
- No Age Limit: Unlike a 401K or an IRA where you need to be 59.5 years old to withdraw funds without penalty, you can withdraw from an IUL at any age.
- Death Taxes Has No Place Here: This is a tax-free death benefit, so your beneficiary(ies) will not have to pay income or death taxes.
- Loan Possibilities: Depending on your policy and available funds, you can borrow from it without facing any taxes or penalities. You also don’t have to pay back the money you take out.
- Unilimted Contributions*: You can contribute as much as you want to this. There are technically no limits. However, if you noticed the *, you know that there is a catch. You have a “max” annual premium amount that you can contribute per year. Anything at or under that amount is tax free. Anything over that amount will be subject to taxes.
- It Has A Floor: IULs have a earning minimum percentage that they use. It will vary depending on the IUL, but mine is 0.75%. This means that if the market tanks and is at -25%, I will still me making 0.75%.
- This was the biggest one for me when I opened it given the everything of 2008, etc.
Now, with all these pros, you must be clamoring to try to figure out how to open one of these, huh? Well, cool your jets for a second cause it’s not all sunshine and roses.
What are the Cons?
There are pros and cons to literally everything, and IULS are not exempt from this. So, here are the main cons:
- It Has A Ceiling: If there is a floor, you will also have a cieling. So, while you are protected from losing, you are also prevented from gaining too much. My current earning maximum is 13.75%. So, if the market earns 25%, I will earn 13.75% in the IUL.
- Better Not Cancel It: If you cancel your IUL and withdraw funds from it, those funds may be taxable.
- Fees & Costs: IULs have fees and those fees can flucuate. They can also be rather high depending on where, when, and who you open it with. The fees are also based on the health and age of insured from when you opened it.
- Mr. FOGA’s fees are higher than mine because he has had more issues with his health than I have, but his maximum annual premium is also higher than mine for the same reason.
For some, these cons are more than enough reason not to bother with IULs. Clearly, I am not one of these people, but I totally get that it is not for everyone.
Last Words
All in all, IULs can be very useful. I definitely think that, obviously, but it is also not necessarily for everyone. The fees can be high and your gains have a ceiling, but tax-free gains with no age restrictions and having a floor is pretty awesome as well.
Here’s where you can go for some more information on IULS:
- What Is Indexed Universal Life (IUL) Insurance?
- Pros & Cons of Indexed Universal Life Insurance
- A Guide to Indexed Universal Life Insurance
I rarely write posts like this, so please let me know what you think. Also, as always, please remember that I am not a financial expert. I just find this stuff cool so please do your own research and consult actual experts before making financial decisions. 😊
So, my final question:
PS: I apologize that this post is late. I did explain on Twitter and, if you are a true geek, you will understand. 😂
Feature Photo by Ray Hennessy on Unsplash
Huh that’s interesting! I didn’t know a darn thing about them before, and only learned their name from your earlier post so this was a learning post for me 🙂
Can you talk more about what made it make sense for you? I’m just curious!
For me, I liked that I could take a loan from them at any point without having to pay it back. So, I can buy an income property entirely from it. I wouldn’t, but it would be an option. 🙂
I know a lot of people hate them due to the fees and the people who sell them, but I like the pros enough to be okay with the cons.
I don’t think I’ve ever seen a post that was anything but critical of indexed universal life, this is a first. 95% of posts are negative for any type of permanent life insurance but the indexed version is usually singled out for the harshest criticism. Interesting to read a post from a satisfied customer.
I haven’t really any posts on them. I do see some mention on Twitter, but not too much. I totally get the criticism. Between the fees and some of the people who sell them, they definitely have their cons. I just think the pros are better. For me at least.
Thanks for reading!