Posted by Unifirst Financials & Tax Advisors

Tax-Free Strategies Utilizing Universal Life Insurance

Tax-Free Strategies Utilizing Universal Life Insurance

Would you grab the opportunity of getting the flexibility of adjustable life insurance premiums and face value and an opportunity to increase cash value? What if without the inherent downside risk of investing in the equities market, you can get this? There is a policy that the above mentioned are possible, the indexes universal life insurance policy. To know if it will work for you and you qualify for one read on. 

What does Universal Life mean?

From fixed-rate models to variable ones, Universal Life Insurance (UL) has a variety of options, you can also select various equity accounts to invest in. Either a fixed account or an equity index account, you are allowed to allocate cash value amounts in the Indexed universal life (IUL). Well-known indexes such as the S&P 500 or Nasdaq 100 and other varieties are offered by the policies.  Compared to fixed ULs, IUL policies are more volatile but less risky thank variable universal life policies. Because in equity positions, no money is actually invested. 

While maintaining a death benefit for retirement, IUL policies offer tax-deferred cash accumulation. You might use IUL if you need permanent life insurance protection but wish to take advantage of possible cash accumulation via an equity index. For business owners, premium financing plans or estate-planning vehicles the IUL might be used as key person insurance. It might be adequately difficult to explain and understand since IULs are considered as advanced life insurance products. 

How will it work?

Based on the life of the insured, a portion is paid for annual renewable term insurance when a premium is paid. The rest of the fees will be added to the cash value after any fees are paid.  The interest of the credited total amount of cash value depends on the increase in an equity index. Selecting multiple indexes is possible in some policies. A guaranteed minimum fixed interest rate is usually offered in IULs and even a choice of indexes. The percentage allocated to the indexed and fixed accounts can be decided by the policyholders.

At the beginning of the month, the value of the selected index will be recorded and it will be compared to the end of the month. The interest will be added to the cash value if the index will increase during the month. Either on a monthly or annual basis, the index gains will be credited back to the policy. For example, the 6% that was gained from the beginning of June to the end of June will be multiplied by the cash value. It will then be added to the cash value. The index gains in some policies are calculated as the sum of the changes of the period. An average of the daily gains for the months is what other policies take. No interest will be credited to the cash account if the index goes down instead of up. 

Referred to as the participation rate, it is the gains from the index that are credited to the policy based on a percentage rate. The insurance company is the one who sets the rate. It can be as high as 100% or more, or lesser than 25%. 

The index interest to cash accumulations is typically credited by the IUL policy either once a year or once every five years. 

Advantages of the IUL Policy

  • The price is low: The premiums are low since the policyholders bear the risk. 
  • Cash value accumulation: Credited in the cash value will grow tax-deferred. The insurance premiums can be paid by the cash value. This will help the policyholder to save money. 
  • Flexible: The policyholder controls the fixed account and the death benefit amounts can be adjusted as needed and the policyholder controls the amount risked in indexed accounts.  A host of optional riders are mostly offered by IUL policies, from no-lapse guarantees to death benefit guarantees. 
  • Distribution is easier: Regardless of a person’s age, the cash value in IUL policies can be accessed at any time without penalty. 
  • Less risky: Since the stock market is not where the policy is directly invested in, thus reducing risk. 
  • The contribution is unlimited: Annual contributions in IUL policies have no limitations. 

Disadvantages of the IUL Policy

  • Accumulation percentage caps: A maximum participation rate that is less than 100% is set by insurance companies sometimes. 
  • Larger face amounts are better: Compared to universal life policies, smaller face values don’t offer much advantage. 
  • Equity index-based: No interest will be credited to the cash value if the index goes down. Market indexes are used in investment vehicles as a benchmark for performance. Outperforming the index is normally its goal. With the IUL, to profit from upward movements in the index is the goal. 

You can always consult us at Unifirst Financials & Tax Advisors if you are a little unsure of what to do. 

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