What Is an Indexed Universal Policy?

October 11, 2022

What is an indexed universal policy? We break down the details and provide you everything you need to know.

Full Transcript:

Hello and welcome to Arista Advice! Question of the week is: "Paul, what is an indexed universal life policy, and should I buy one?" Well, with the market being uncertain, with the market going up and the market going down, life insurance companies are out there marketing their minds out on how to get people to abandon their long-term financial plans and buy insurance products. Please be aware, be aware, be aware of what's out there, and always know what's really behind these insurance policies.

So, let's talk about an IUL. Also, be aware that IULs are marketed as a catch-all "We can fix all of your problems, and so give us your money as an insurance company." An IUL provides a death benefit, just like every other insurance policy that is out there. It also has a cash value that you can borrow against in the future.
Number two - contributions are split between the premiums and fees to keep the death benefit enforced, and extra contributions are added to the cash value.
Number three - the cash value can pay for the premiums of the death benefit, and if there is a positive market, the cash value can pay the premium, so you don't have to put anything in.
Number four - the cash value is indexed with the market with a guaranteed minimum but is then capped. So if the market does 12, you're only going to get six. If the market does 20, you're only going to get six. If the market does 30, you're only going to get six. If the market does 25, you're only going to get six. The market is positive 75% of the time. So why would someone give up the upside?
Number 5 - IULs can be powerful tools for estate planning and more, but because of the fees and the limited growth, IULs may not be the best. As you can see in this chart right here, if you go back the last 30 years and you take an IUL capped at 6%, and you take the Standard & Poors 500 broad index, you can see that the index gave you a net return of $3.9 million compared to an IUL that gave you $1.4 million. Not even half.

So what happens? You end up paying for that life insurance and that ability to sleep at night, and somewhere in between or a broad mixture of other investments are topics and conversations you want to speak with your professionals. Always remember that market IULs are not a one-size-fits-all solution. The perfect investment tool does not exist.

Remember to talk with your advisor about the pros and the cons about using insurance vehicles to fund your future retirement. Please remember to go to AristaWealth.com to get other tools, tips, videos, and resources to help you live a life of significance.