Indexed Universal Life

What is indexed universal life insurance?

Indexed universal life insurance is one of the most exciting products sold throughout the United States. And for good reason. Indexed universal life insurance is a flexible premium permanent type of policy. It contains both an insurance component and an investment component.

It offers a combination of tax advantages not available with any other financial, investment, or cash accumulation product.

These advantages include:

  • Tax-deferred accumulation of cash values
  • Tax-free income via withdrawals and policy loans
  • Income tax free proceeds to policy beneficiaries at death

Advantages of indexed universal life insurance?

Tax-deferred accumulation:

The basic reason to own indexed universal life insurance is to provide for the financial security of beneficiaries in the event of a premature death.

However, a secondary motive for buying indexed universal life insurance is the advantages of tax deferred cash value growth. The policy performs best when premiums are “over-funded”. For example, cash values will accumulate over time if actual premium payments exceed the policy’s expenses and mortality costs.

Each year, interest is credited to the policy’s cash value based on the performance of a stock index. Typically, the cash value growth is indexed to the S & P 500 index. Over the year’s cash value will continue to grow tax-deferred. Cash values can then be withdrawn in the future for supplemental retirement needs. 

Tax-free income via withdrawals and policy loans:

Cash value accumulations that have grown inside of an indexed universal life insurance policy may be accessed from the policy tax-free.

Withdrawals of cash value on life insurance policies are generally not taxable as long as the amount withdrawn does not exceed the premiums paid into the policy. This is known as the “basis”. Then to avoid taxation on any of the withdrawals above the policy basis a policy loan can be used to access additional cash value tax-free.

It is important to remember, than any loans borrowed against the cash value of the policy, will typically be charged a loan interest rate. This loan interest will accrue on the policy, and if not repaid the loan and interest will be deducted from the policy at death. It is also important to remember that if a policy is surrender or lapsed taxes on the loan may apply.

Income Tax-free proceeds to beneficiaries:

Under current tax laws, life insurance death benefits that are payable to a named beneficiary are received income tax free. When an insured dies, proceeds less any outstanding loans and accrued interest are paid typically in one lump sum.

How is interest credited to my policy?

Indexed universal life is not a new savings strategy. It has been around for nearly 20 years. The indexed universal life policy really started gaining traction after the stock market slide in 2000.

Indexed universal life insurance is categorized as a fixed investment product. Most indexed universal life policies offer a guaranteed minimum floor on the cash value. This protects any one individual from loss if the index has a down year. The insurance carriers also typically set a “cap” or ceiling on what can be earned on the cash value account above and beyond the cost of insurance and administration cost.

This cap is often set around 8-14%. But, it is important to remember that this product is designed to offer returns that are better than traditional fixed investments or bonds without the risk of stock market loss. So, to expect a 12 or 13% return each year is not only pie in the sky thinking, but not prudent for planning purposes.

So let’s say you purchase an indexed universal life insurance policy to protect your loved ones and to potentially accumulate cash values for future needs. Any amount of money above the policy costs will go into the savings element. This savings element (S &P 500 index) will grow at a tax advantaged pace.

You will receive a minimum guaranteed rate (depending on the carrier) even if the index is down. If the index is up, you will receive that rate of return up to the cap designated by the carrier.

As an example, the S & P 500 index has a terrific year and returns 21%.(Dividends are not included in calculation of indexed universal life) Your cap rate on your equity indexed universal life rate is 12%. You would be credited 12% on your cash value for that year. That interest is locked in and cannot be lost in future years.

Now, let’s say the next year the S & P 500 has a terrible year and is down 18%. The indexed universal life policy would credit 0% for that year. But, that’s okay. Remember, their are no losses with the indexed universal life.

Also, the 12% you earned from the previous year is not lost. Most carriers re-set the index each year and lock in any previous years gains. This is what makes the indexed universal life policy so attractive to many who are afraid of the volatility and potential losses in the market.

Summary of indexed universal life

Indexed universal life policies provide many of the same protections as do other permanent life insurance polices. These benefits include tax-deferred growth of cash value, tax-free death benefit and tax-free withdrawals. What sets equity index universal life apart is the flexibility of premium payments and the ability to obtain additional growth potential.

With your funds bench-marked to an underlying index (or in some cases multiple indexes) your interest is credited to your account based upon market performance, but without the downside risk of loss of principal. This can make a huge difference in growing your retirement safely.

If you would like more information or see an illustration of how indexed universal life works, please contact us at 1-888-393-9003 or

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Mike Raines

I am an independent life insurance agent with over 30 years’ experience. I am an expert in finding coverage for those with past or current medical history such as heart disease, diabetes, post cancer, etc. I also specialize in those that participate in scuba diving, mountain climbing, private pilots, etc. I work with the best life insurance companies in the nation, such as Prudential, AIG, Protective Life, Transamerica to name a few. Each carrier has different opinions on rates and underwriting, and it is my job to match you with the best company. To do that, I need to ask you a few questions about your health and lifestyle to qualify you.

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