What is IUL life insurance?
A New Generation of Life Insurance
-E.F. Hutton (Smith Barney) -LI with bundled protection and investment -Tax deferred cash accumulation -Tax free death benefit -High interest rates in early to mid 80's -Computer software to generate proposal and manage policy features
Modified Endowment Contract (MEC) Tax Warning!
MEC? -When the total premiums paid in the first 7 years exceed the guideline annual premiums (established by IRS) Withdrawals -Interest out first - taxed as ordinary income as opposed to interest out last and tax deferred with life insurance
corridor requirement
The minimum amount of pure risk that must be maintained in a life insurance policy for it to meet the statutory definition of life insurance. Meeting this definition qualifies the policy for the favorable tax treatment given to life insurance policies.
Minimum Interest Guarantee
UL policies guarantee a monthly interest credited that will NOT be less than a certain guaranteed min. Typically 3% or 4%.
Index Universal Life Insurance
well... you know this one already
Indexed universal life insurance policies offer the potential for higher cash value growth than other policies because?
you can participate in potential upside of the market, without having to worry about downside risk.
Policy is tax-deferred which means?
you will not have to pay taxes on it until you withdraw the money.
What creates a MEC?
-Increase in premium payments, reduction in death benefit, or withdrawal of CV may trigger a conversion to MEC -To avoid MEC, excess premiums may be returned with interest within 60 days following policy
Main benefits of IUL
1. it offers the potential for higher cash value growth than other types of life insurance policies. - because you are able to participate in the upside potential of the stock market without having to worry about the downside risk. 2. it provides you with the flexibility to adjust your premium payments and death benefit amount. - This means that you can customize your policy to fit your unique needs and goals.
Most life insurance policies are split into two parts:
A death benefit that pays money to someone when you die. Cash value that can grow over time.
Variable Universal Life Insurance
A form of universal life insurance that allows the policyholder to make fund choices for the investment component but that has no guaranteed cash value and no guaranteed interest rate.
What Is Accumulation Indexed Universal Life Insurance?
Allows you to accumulate your cash value by the growth of the selected index and if index drops you do not risk loss, because policy does not go below minimum rate.
Alternatives to UL
Current assumption whole life -Current interest and mortality but limited or no flexibility in premium and death benefitVariable life -Offers more investment options for CV but greater expense loadsDeferred annuity plus term -Annuity CV withdrawals taxed as interest plus 10% penalty (poor option)
How to Compare Universal Life Policies
Front end expense loads Current and guaranteed interest Current and maximum mortality rates Surrender charges ***Best short cut is to compare current cash values for first five years
Cash Value and IUL
IUL has a cash value you can use for growth by tracking its performance.
Market or Actual Interest Crediting Rate
In traditional cash balance plans, the interest credit rate is usually a fixed interest rate, a variable rate, or even a combination of the two. But market-based plans use an interest credit based on actual market performance.
Universal Life Insurance Cons:
It is more expensive than term life insurance. Cash value growth potential is capped. The cost of the insurance premiums increases as you age. If you use the cash value to pay for premiums, there may be no money left to pay for your insurance coverage, and the policy expires . Plan on having minimal cash values.
unbundled
Mortality interest and expenses are separate policy elements for the UL insurance. Premium are subjected to cash value which are credited a rate of interest. Insurer deducts the amount to cover the mortality and opert. expenses. Policy's cash value needs to remain in force.
CQ: Withdrawals from a MEC are taxed as:
Ordinary income plus 10% penalty
Two different types of IULs
Participation and Non- Participation
What Is Protection Indexed Universal Life Insurance?
Relates to the investing of the death benefit fund which holds the same truths as the cash value.
With universal death benefit protection is ??
Tax free
Who should buy universal life insurance?
Universal life insurance products are usually for people with a lot of money or need to ensure that the government does not take their money. However, it can be good to use this if you have maxed out all your investments and want more money without going into a higher tax bracket.
Unlike traditional IRAs or 401(k)
Unlike qualified accounts such as 401(k) and IRA's, you can access the policy cash values pre-59.5 without incurring taxes or penalties. Unlike a 401(k) and Traditional IRA, you can access the policy cash values without increasing your Social Security tax or Medicare premiums.
Another categories of UIL:
Variable Universal Life Insurance Index Universal Life Insurance
What's different with Universal life insurance?
With Universal Life insurance policies, you can change the amount of money paid out when you die and use any gains from your cash value to pay for your premium.
IUL benefits for high net worth individuals:
Your whole life, you will have this insurance. You can earn interest that does not dip below 0%. The money that it collects is tax-deferred. You can decrease your monthly payments if you want to do that. Universal lasts your whole life. Premium payments are customizable. Your beneficiary receives the death benefit income tax-free.
what is an index?
a group of investment (such as stocks or bonds).
guideline premium test
a test a policy must meet to qualify as a life insurance. to receive favorable tax status for life insurance. to determine whether the policy is "overfunded".
What is IUL life insurance?
a type of permanent life insurance that offers policyholders the opportunity to accumulate cash value. The cash value of your policy is based on the performance of one or more stock market indexes, such as the S&P 500 Index. When the stock market index goes up, so does the cash value of your policy. However, when the stock market index goes down, the cash value of your policy will not go down.
Indexed Universal Life Insurance allows you to
adjust your premium payments and death benefit amount.
Corridor requirement: Level Death Benefit
cash value increases too rapidly from paying too high premium the death benefit will increase to maintain the min. corridor protection.
Death Benefit Option 1
death benefit under which the benefit payable when the insured dies stays level and equal to the initial specified amount. (Option A).
UL Mortality Charges
deducted from the UL policy cash values which will reflect the cost of insurance for that point in insured's life. Similarly to Term but with a cash fund.
Death Benefit Option 2
generally increasing death benefit. Specified amount plus its cash value. the death benefit never decreases to less than the specified amount stated in the policy. cost insurance ded. are higher.
Premium flexibility
payments can be skipped as long as the cash value can support the monthly deductions.
Non-participation
policies do not offer you the opportunity to participate in the stock market's upside potential, but they do offer a higher guaranteed minimum interest rate. This means that your cash value will grow at a slower pace, but it will be more stable than a participation policy.
Participation IUL
policies offer you the opportunity to participate in the stock market's upside potential, but you will not be subject to the downside risk. This means that your cash value will fluctuate with the stock market, but it will never go below the guaranteed minimum interest rate.
Adjustable Life
policy owner can change three elements: 1) premium 2) cash value 3) death benefit.this can cause the policy to function as a term, ordinary whole life or a limited payment life policy.
target premium
premium level at which insurers typically pay full first-year commissions to their agents.
Insurance companies use indexes to
set the interest rate for their policies.
You can use the cash value of policy for purposes including:
supplementing your retirement income, paying for long-term care expenses, or funding a child's education
Your beneficiary receives the death benefit
tax - free
Like a Roth IRA you can pull money out....
tax-free
maximum premium
the highest amount that can be paid for that level of death benefit and still allow policy to meet the guideline premium test.
minimum premium
the minimum amount that is estimated to cover the cost of pure UL insurance and policy expenses.
Why people want life insurance.
to pay off debts, and some people might want to pass on the family's wealth without paying taxes. Permanent policies can be good. If you have enough money, an IUL policy can help you do these things too.