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November 18, 2015 at 07:00 PM
Diversification is one of the guiding principles of financial planning to help mitigate risk. No single asset class or market performs best in all economic environments. If financial planners diversify a customer’s investment portfolio, why wouldn’t that same principle carry over to managing a client’s life insurance and supplemental retirement assets?
Financial planners may be looking to Index Universal Life (IUL) insurance as a solution to meet many client needs: death benefit protection, tax advantaged cash accumulation and living benefits. Some Index Universal Life policies offer index interest crediting based on a diverse mix of market indexes, including global indexes. Financial planners like the versatility of this IUL feature to help them round out a client’s overall financial plans.
Tax-deferred cash value and earned interest:
The popularity of the index universal life policy attests to the versatility of life insurance. Provided there is sufficient cash value, a policy owner may take tax-free loans and withdrawals, while still providing a death benefit legacy to their loved ones. (Note that loans and withdrawal will reduce the death benefit and if a policy lapses with a loan outstanding, taxes may be due.)
Any index interest is based, in part, on changes in specified market indexes. Generally, the crediting methodology involves a cap and/or participation rate, established by the insurance company, which determines the maximum rate of interest that may be credited. The insurance company also determines a minimum guaranteed interest rate, or floor.
While changes in the value of an index are used as part of the interest-rate calculation, an IUL is not an investment in the equities market. The interest crediting rate will never be lower than the policy’s floor. So, even if the index has declined during the interest rate period, the index accounts do not lose money as a result. Here’s another benefit to a cash value life insurance policy: The cash value accumulates tax-deferred. There are no taxes on any gains in the policy during years in which they are earned or while they remain in the policy. And they may be accessed income-tax-free through withdrawals, up to the cost basis, or through loans.
