IULs (Indexed Universal Life Policies)

IUL policies provide permanent life insurance along with the potential to grow the value of the cash portion of the policy based on the performance of a designated index or indexes. An IUL policy is not actually invested in the stock market, but interest is credited to the policy based on its index’s performance as spelled out in policy contract provisions.

As discussed in Part 1, Indexed Universal Life policies are not right for every client, but they can be good for some. IULs are sometimes called a “rich person’s Roth” by industry insiders since there are no income limits placed on them.


Potential Tax Advantages of IULs

When you start analyzing what happens in retirement, especially when RMDs kick in at age 70-1/2, you realize that income taxes could play a huge role. Think of it this way, if you passed away with $1 million in your bank account, at a 30% tax rate, $300,000 of your money would go to the government. So how can you structure a client’s investment portfolio so that they pay the least amount of tax?

The tax treatment for retirement vehicles breaks out like this:

Some advocate a strategy for certain pre-retirees, where you roll over taxable or tax-deferred money into an IUL policy over a period of three to five years, allowing the policy itself to pay the income taxes due in each year. IULs still credit interest based on the policy’s original cash value even when withdrawals are taken out. (The withdrawals reduce the death benefit.)

Other Benefits to IUL Policies

  • No capital gains tax
  • No income or policy limits (but policy amounts are subject to underwriting)
  • Not included in provisional income when calculating taxation of Social Security benefits
  • Eliminates taxable interest (as long as policy is in force)
  • No RMDs are required at 70½
  • No 10% penalty for withdrawals pre-59½
  • Potential for lifetime income in retirement, spousal transfer benefits, long-term care coverage and disability coverage as part of the policy itself, or through the use of policy riders

Things to Remember When Considering Life Insurance

  • The primary purpose of life insurance is to provide death benefit protection for policy beneficiaries. If you don’t need financial protection in the event of death, there may be other ways to pursue client goals.
  • Withdrawals and loans can reduce the policy death benefit and cash surrender value and may cause the policy to lapse. Lapse of a life insurance policy can cause the loss of death benefit and potential adverse income tax consequences.
  • Indexed life insurance policies are credited interest based on the periodic changes in an associated index. They do not represent an investment in a market index.
  • Policies classified as MECs may be subject to tax when a loan or withdrawal is made, and a federal tax penalty of 10 percent may also apply if the loan or withdrawal is taken prior to age 59 1/2. You should ensure that the policy is not structured as a MEC.

Policyholders should consult with tax professionals to determine the potential impact of surrenders, withdrawals or loans. Cost of insurance expenses, mortality risk charges and other expenses may reduce the policy’s cash value. Unpaid policy loans could negatively impact death benefits upon death of the policyholder.

If you are a financial advisor and would like more information about the ways Shurwest can help you and your clients with unique IUL strategies, call us at 800-355-0581.