Indexed universal life insurance is a type of policy coverage that became available about 10 years ago and is generally considered a good investment for retirement. The invested cash value of indexed universal life policies is tied to fixed income instruments and financial indexes like the S&P 500 and Nasdaq, also known as equities or stocks.
Most of the investments are in bonds and indexed universal policies offer a minimum guaranteed rate of return on the cash value, but can produce higher returns if the stock market performs well.
Consumers should research indexed universal life insurance before investing since there are pros and cons, depending on your risk tolerance and financial needs.
Permanent Life Insurance
Many equity indexed policies are types of guaranteed life insurance which never lapse. Universal life insurance rates are more affordable than whole life rates for the same coverage.
Some indexed coverage offers a minimum guaranteed return on investment, but it is usually lower than the rates guaranteed on the cash value of whole life insurance due to enormous upside. No investment opportunity allows you to have the best of both worlds.
Equity indexed bond investments usually have more stable returns over time than other universal policies which invest in stocks; however, universal life policies also offer the potential for higher returns over a longer period of time, helping build a nest egg for retirement.
Variable Life Insurance Rates
One of the disadvantages of indexed life insurance is the rates charged for the insurance portion of the policy increase over time. This means that more of the premiums are used to pay for the life insurance and less are put into the investment account. The minimum and maximum premium payments remain the same, but less money is invested in building the cash value.
Long term projections on the investment value of these policies may not take into account increases in insurance rates over the life of the policy, slowing the growth of your investment and money. Nonetheless, this can be balanced by the fact that you will accumulate a large cash value when the policy is first issued. The returns you receive, for example 10% per year, will be on a larger amount of money invested early on.
When in doubt, consumers can research to find other types of policies that better fit their needs. A life insurance policy comparison can help potential applicants find the best coverage and favorable terms and conditions.
Income tax must usually be paid on investment returns as they are earned. Fortunately, the profits on life insurance cash value are tax-deferred until they are withdrawn from the policy. Retirees often take out loans against the cash value of indexed universal life insurance policies so they do not have to pay income taxes.
If the amount of the loan equals the amount of the cash value, the policy is cancelled and taxes become due at that time. The single, lump sum tax payment can be substantial if this occurs.
A Long Term Commitment
As an investment, universal life insurance is a long term commitment. In order to realize a profit on your investment, policyholders must be prepared to remain in the investment and not change their strategy in the short term.
In addition to increases in the amount of premiums devoted to the insurance portion of the policy, there may be fees associated with the investment account, such as broker commissions and mutual fund fees.
Again, it is important to note that, life insurance is not a one-fits-all type of product. If you feel more comfortable getting a term life insurance rate that expires over a certain period of time versus a long term commitment to permanent coverage, then you should consider those options as well.
Due to the potential ups and downs of the stock market, some investors or consumers may not feel comfortable with universal life insurance and prefer something more stable and guaranteed, like a whole life policy.
Those planning to use indexed life insurance as a retirement investment should research policies and insurance companies carefully to find carriers that offer solid, long term returns while controlling risk.
Just as you research any financial product, ask the company for a prospectus or have a financial advisor explain how the investment account works. Universal life insurance as an investment can be a smart choice, but only if you decide it is the right policy for you and your family’s financial needs.
Compare Coverage and Quotes Online
Financial experts differ over the value of indexed universal life insurance as an investment. Many agents point out that term life insurance is cheaper and individuals can invest the money saved on coverage. Since term life rates increase with the age of the insured, the cost of term coverage actually averages out to about the same amount as indexed universal life insurance over time. Term life insurance does not offer the investment opportunities of equity indexed policies do and retirees can also benefit from the tax advantages.
Naturally, consumers must review indexed universal life insurance pros and cons before making a decision on whether to consider purchasing a life policy. Part of making that decision includes comparing life insurance quotes to determine whether premiums can fit into your budget.