Is Fixed Indexed Universal Life Insurance a Good or Bad Investment?
Fixed Indexed Universal Life Insurance is NOT an Investment!
Let's make this clear Fixed Indexed Universal Life Insurance is not an investment it's Life Insurance! Now before you start thinking about dying let me just say that I think life insurance is improperly named and should be called Death Insurance. Fixed Indexed Universal Life Insurance, hereon called IUL, has many benefits in addition to the obvious death benefit. IUL's will provide you with benefit such as Tax-Free Income in your retirement years, and stock market like returns without the risk.
Stock Market Like Returns Without the Risk!
Let me ask you a question? If you were to sit down at a Black Jack table and the worst you could do was push, would you ever get up from that table? I think the answer to that question would be no. The IUL is that Black Jack table.
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Funding IUL as a Single Premium
When funding an IUL as a Single Premium, the contract will become a modified endowment contract, which by the way is the same thing as fixed deferred annuity. It means that you have to pay taxes on a LIFO (Last in First Out basically interest) basis. Which also means that if any loans are taken from the policy, they will be taxed as ordinary income. With that said, nobody in their right mind would want to take a loan from a modified endowment contract, they would want to take the LIFO method.
Funding an IUL with a single premium is a great way to pass on excess wealth to loved ones. First of all, your monies will grow much quicker than if you invested the money into a Certificate of Deposit. Secondly, the death benefit will be much larger than the actual premium paid and it will be TAX-FREE.
Funding IUL with Flexible Premiums
Funding the IUL with flexible premiums is how the majority of IUL's are sold. Maximum funding an IUL is common because of the benefits it provides you in retirement. The benefits of a Tax Free income at retirement. Many people don't realize that when they retire and start receiving their social security that making the wrong investment choices in planning their retirement were wrong. When you think of retirement, you think IRA, 401K right off the bat. These are the types of investments that will cause you to have up to 85% of your social security taxed as ordinary income. The IUL can provide a tax free income guaranteed for the rest of your life.
It's Not about the Cap
Don't be fooled when a company tells you that their cap is higher than the others. It's about the internal costs of insurance and other fees. Every company has their own niche as to the age group and health factor when they price their products, so a 43 year old female may have the lowest rate with one company a 44 female may not. Best advise, ask your adviser if they are comparing many companies or just his / her "favorite". The favorite may cost you a lot of money.
How do IUL's earn?
IUL's earn by purchasing options in Indexes. Every IUL index options are different. Basically the insurance company purchases an option on your behalf either on a daily, monthly, or annual basis. At the end of the contract year, the insurance company adds up all of their gains up to the cap and then adds up all of the losses and divide by the number of transactions, if monthly, it would by 12. By doing this, it will provide the insurance company an interest rate. I have seen contracts earn upwards of 25% in one year. The best part is that when the stock market goes down, you don't suffer any so called paper losses.
Chronic Illness / Long Term Care Rider
Many companies offer Chronic Illness / Long Term Care Riders, be careful some are much better than others, and some even offer them for free? Chronic Illness riders will pay you all or a part of your death benefit while you are still alive. Did you know that a high percentage of families where the bread winner suffers a chronic illness such as Heart Attack, Stroke, or Cancer will file bankruptcy within a short 2 years after first diagnosis. It's not because they don't have health insurance, they do. It's because, after suffering a chronic illness, you don't just get back up on your feet and go back to work. How nice would it be to be able to use your death benefit while you are still alive. Try doing that with your 401k or IRA let's see how heavily they tax you not to mention, with the IUL you had the bank built for you via the death benefit verses you building the bank with your annual contributions.
Now let's talk about the Long Term Care benefit. One big concern for seniors is the costs of long term care. First off you could purchase a traditional long term care policy when you get to the age of retirement and pay premium increases until you can't afford them any more, or pay for something you never use, or you can plan for it now. The long term care riders on many of these policies allows an insured to access their death benefits to pay for long term care expenses.