In this episode of Coffee with Carl, attorney Carl Zoellner covers the general principles of IULs, or indexed universal life insurance policies.

 

Updated September 9, 2020

Indexed universal life insurance policies (IULs for short) are a great tool that many don’t know about or aren’t sure how to successfully utilize. Although I’m not a licensed insurance agent (nor do I want to be), it’s useful to take a big-picture look at IULs: what these plans do, for whom they’re appropriate, and the different purposes for which they can be used.

Personally, I have an IUL that I use as an additional funding source for my deals. Basically, indexed universal life insurance is life insurance with no term limit, plus all these ancillary benefits. I currently overfund my IUL with the intention of borrowing against it down the road.

Use a Fiduciary

There are many different ways IULs can be constructed. If you’re interested in utilizing this strategy, it’s critical that you first have an individual consult with a licensed insurance agent to get the policy that best fits your needs.

My preference (and who I used for my personal IUL) is Anderson Financial Services (AFS), our sister company. There are plenty of insurance agents out there who will design an IUL that benefits the agent more than the policyholder, so you must do your due diligence. I have seen client IULs that don’t benefit the client nearly as much as the agent. I feel confident vouching for AFS because, as fiduciaries, they’re obligated to advise in your best interest, not theirs.

IUL Basics

Indexed universal life insurance differs significantly from term life insurance. Generally, with term life insurance, you have a term for which the policy applies, you pay along the way, then, if you die within the specified time period, there’s a death benefit. With an IUL, the strategy is to overfund the policy so you can eventually borrow against the death benefit.

Furthermore, this loan is not dollar-for-dollar. As you put money into the policy, the death benefit grows. You can then borrow more money from the plan than you put into it because you’re borrowing against the death benefit. I like to use my IUL as a funding source. The loans are quick and have relatively low interest rates. Plus, if you never pay the loan back, the loan amount is subtracted from the death benefit at the end.

In essence, by putting more money into an IUL, you create an additional funding source. In my mind, the benefits of IULs are threefold:

  1. You contribute to your own life insurance policy,
  2. You receive a more than dollar-for-dollar benefit, and
  3. With the plan’s indexing, you’re growing at a rate of interest.

Regarding #3: IULs invest their funds in the market — in a conservative stock portfolio, for example. With IUL indexing, there are caps. You won’t lose money. The bottom cap is 0, and the top cap is 7%. IULs can grow up to 7%, but what you’re missing out on is north of that. If the market grows at 15% in a given year, for example, you would still only receive 7%. However, the up-side to this is that the bottom cap is 0. If the market has a bad year, you may not make anything on the policy, but you won’t lose money, either.

The Takeaway

Overall, IULs are still insurance policies. This means that it’s essential to speak with a licensed insurance agent individually. As insurance policies, some IULs will require a medical exam, and some won’t. I always recommend our sister company, Anderson Financial Services, because of their fiduciary nature.

 

Watch as Carl covers the big-picture basics of indexed universal life insurance policies (IULs) and how this tool can be used to benefit investors and business owners.

 

As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.

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Got an idea for a future Coffee with Carl? Send it to Carl at cwc@andersonadvisors.com.

 

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