IUL Pros & Cons

Indexed Universal Life, or IUL for short, is not for everyone. First of all, it takes 12 to 15 years to build up a reasonable cash value. So it's recommended for people 65 years of age or younger. And it's best for people between 35 and 55. If you want detailed information on IULs, please watch my video up here. And if you're considering an IUL, you should understand what the pros and cons are. So let's get into it. Here are the pros. An IUL contract has no risk to stock market downturns because it's an indexed product with a ceiling and a floor. So zero risk. No annual contribution limits, no age restrictions, no required minimum distributions, no 59 and a half rule, easy and penalty-free access to your money, market-like returns, and your money grows tax-free. And you get a tax-free retirement income. You get a death benefit and living benefits. And I'll go over that in a minute. And the fees are limited if it's structured properly. You know, many people don't know this, but the money you make from Social Security and retirement may be taxed as income if you make more than a certain limit. The income from an IRA or your 401k, for example, might just put you over the limit and therefore cause your Social Security to be taxable. And then you end up in a higher tax bracket. But with an IUL, the income you take does not count towards taxing your Social Security benefits or surcharging your Medicare premiums. So let's break all this down. We'll start with fees. If your IUL is structured properly for maximum cash accumulation, fees are a pro. If not, it's a con. With the understanding that an IUL needs 15 years to build a significant cash value, the front-loaded fees are a pro. Fees are front-loaded for the first 8 to 12 years. And that's a good thing, but it can also be a bad thing because you're paying higher fees at the start of your contract. But these fees are also calculated on your account value, which is smaller in the beginning. But after the 8 to 12 years, your fees are much less. And over the life of the contract, you pay less overall and much less in fees than you would pay to a money manager. Tax benefits. Because IUL takes advantage of IRS Code 7702, which allows your retirement income to be tax-free, your money grows tax-free, you pay zero taxes on your IUL retirement income, no taxes on your estate and inheritance when you die, and your beneficiary pays zero taxes when they claim the death benefit. You can also access your money tax-free through policy loans. And to get more information on how policy loans work, you must watch my video up here, all about that. And I will put a link to that below. When you take a participating loan, your money never leaves your policy account. It continues to earn interest. So you earn interest on the money you loan yourself. Now you're charged interest for taking that money out and for borrowing it. But the interest you're getting on that money far offsets the charge. And you'll see that reflected in your cash value. The value of the loan is deducted from your accumulation value, but your accumulation value stays the same. Now the greatest difference between policy loans and traditional loans is that you don't have to pay back the loan to your insurance policy. When you borrow based on your life insurance policy's cash value, you're actually borrowing from the life insurance company. And the cash value of the policy and the death benefit are used as collateral. If you don't pay back the loan, the insurance company will take it from the cash value of your policy or deduct it when the death benefit is paid out. And if you don't pay the loan back and the interest combined with the amount borrowed starts to exceed your cash value, you could be putting your life insurance policy at risk. No risk to stock market downturns. With an IUL, you choose an index like the S&P 500, for example. Your money is not invested in the index, so it's not in the stock market, but you get the return based on the movement of the index. Your money grows however the index performs up to a limit or a cap, let's say 12%. Now if the market grows 15%, your money will only grow up to the 12%. But the trade-off is complete downside protection from market losses. So just like you have a cap, you have a floor of zero. So the worst thing that can happen is you get zero interest in market downturns. In other words, you lose nothing ever. There are some options, however, that allow for uncapped gains. Living benefits. Because this is a life insurance policy, you actually have access to the death benefit tax-free while you're alive in the event you have a chronic, critical, or terminal illness. And it also allows the death benefit to be distributed before death to pay for long-term care. Now for the cons. Bad agents, fees, cost of insurance, long-term commitment, performance risk, and interest rate risk. Most of these cons are related to the design of your policy. Very few agents know how to structure these properly for maximum growth, or possibly they do and are commission hungry, and they'll actually sacrifice your money's growth only to put more money in their pocket. Fees are a pro, but also a con. A poorly designed policy by a bad agent can wreck your IUL. These policies must be designed with the smallest death benefit the IRS will allow, because the death benefit is what drives the fees. And like I said, bad agents can juice their commission, which hurts your policy performance. So just make sure your agent is a fiduciary who puts your interests above their own. The cost of insurance is based on your age, your rating, and the insurance amount. And the reason the cost goes up is because you're more likely to die. A properly designed IUL policy is one that provides enough cushion in the beginning years to protect your policy from the rising cost of insurance down the road. Interest rate risk. If interest rates go down, these policies perform worse, and vice versa. However, here we are almost in 2021, and the interest rates can barely go any lower, so I'm not really worried about that. Performance risk. Investment performance is not guaranteed, because IULs are linked to a market index like the S&P 500. There's no way to know how they're going to perform. If there is, for example, a market crash, you don't have to worry about losing money, but during that downturn, your money isn't growing, but you're still having to pay fees, and those fees are coming out of your account. IUL policy should be a long-term play, so the insurance company is counting on you keeping your money in the account long-term. If you choose to exit the policy early, you will be charged a surrender charge. To conclude this video, there are plenty of good reasons to choose an IUL, but they need to be understood and weighed against the disadvantages and your own personal situation and needs. As usual, if this video has been of value to you, please give it a thumbs up, comment, and subscribe.