18 reasons for making indexed UL part of your portfolio

Indexed universal life insurance provides death benefits to the beneficiaries of the IUL owners. Mutual funds provide no such guarantees or death benefits of any kind. (Photo: Thinkstock)

Why accountants, advisors prefer IUL to mutual funds 

Related: How (and why) indexed universal life really works

1. An IUL policy account value can never lose money due to a down market. IUL guarantees an account value, locking in gains from each year. 

2. IUL account values grow tax-deferred like a qualified plan (IRA and 401(k)). Mutual funds don’t—unless they are held within a qualified plan. Simply put, this means that your account value benefits from triple compounding: You earn interest on your principal, you earn interest on your interest and you earn interest on the money you would otherwise have paid in taxes on the interest. 

3. There are few limitations on the amount that may be contributed annually to an IUL.

4. You control your taxes, not the fund manager. IULs grow tax-deferred, and are never taxed if taken in the form of policy loans. 

5. Mutual funds often make annual taxable distributions to fund owners, even when the value of their fund has gone down in value. An IUL grows tax-deferred, cannot lose value in a market downturn, and imposes no annual tax reporting as it increases in value.

6. Mutual funds may cause income taxation of Social Security benefits. The growth within the IUL is tax-deferred and may be taken as tax-free income via loans. The policy owner (vs. the mutual fund manager) is in control of their reportable income, thus enabling them to reduce or even eliminate the taxation of their Social Security benefits. 

7. The record-keeping requirements for owning mutual funds are significantly more complex. The keeping of excellent records (redemptions, purchases, dates, values, commissions, etc.) is often one’s only defense in the event of an IRS audit. With an IUL, the insurance company keeps one’s records, copies of annual statements are mailed to the owner, and distributions (if any) are totaled and reported at year-end. 

8. Medicaid disqualification and lifetime income. An IUL can provide their owners with a stream of income for their entire lifetime, regardless of how long they live. Insurance is often classified so that it is not considered assets for Medicaid disqualification of nursing home costs. 

9. Chronic and terminal illness rider. All policies allow an owner’s easy access to cash from their policy, often waiving any surrender penalties when such individuals suffer a serious illness, need at-home care, or become confined to a nursing home. Mutual funds do not provide a similar waiver when contingent deferred sales charges still apply to a mutual fund account whose owner needs to sell some shares to fund the costs of such a stay. 

10. Indexed universal life insurance provides death benefits to the beneficiaries of the IUL owners. Mutual funds provide no such guarantees or death benefits of any kind. 

11. IULs allow the tax-free exchange of one policy for another. A mutual fund owner cannot move funds from one mutual fund company to another without selling shares at the former (thus triggering a taxable event), and repurchasing new shares at the latter, often subject to sales charges at both. 

12. Mutual funds don’t provide cost-free asset rebalancing whereas IUL does. Rebalancing one’s portfolio within a family of mutual funds always requires the sale and purchase of shares, often generating both taxes and commissions. 

It’s easy to understand why IUL is setting sales records, particularly with 36-55 year old prospects. They’re motivated consumers who take retirement seriously and want to do all they can to maximize their assets. While IUL may not fit every prospect, the opportunities are enormous.

Related:

5 alternatives to Indexed Universal Life insurance

The top 10 IUL myths and how to debunk them

Why (and how) insurers are combining whole life with indexed universal life

IUL product sales on the upswing