What is Indexed Universal Life Insurance?
Indexed Universal Life Insurance it is life insurance that offers a choice between a fixed interest rate paid on cash values or a rate that varies depending on the movement of an index chosen by the policyholder.
The index can vary by company or product. The most popular option is S&P 500.
A common misconception of Indexed Universal Life Insurance is that the policyholders gain expoer to the stock market because of the indexing feature and therefore face market risks.
The indexing feature is merely an alternative method of determining the interest rate at which money in an indexed universal life insurance policy will earn.
The indexing feature itself generally has a cap on the interest rate. For example, if the cap on the indexing account for the S&P 500 is 12%, any rise in the S&P beyond 12% will not affect the interest rate, it will remain at 12% and go no higher.
The indexing feature also has a participation rate that determines how much a rise in the index will actually go towards the interest rate. For most products, the participation rate is 100%, meaning the interest rate will be whatever the move in the index is up to the cap. There are a small number of non-capped products with differing participation rates.
The index account itself tracks a specific period chosen for which the policyholder has an array of options. The time period can be over the course of one year, one month, several years, etc. The most common option is one year.
Since it is Universal Life Insurance, it also affords the policyholder complete flexibility as regards premium amount and timing. This allows policyholders to reduce their planned premiums down to zero if need be and make up these reductions in later years should they choose.
It also allows policyholders to resume funding a policy several years after tthey have stopped if they find themselves in a financial situation that allows them to do so.
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Indexed Universal Life Insurance Policies: The perfect option for Professionals and Business Owners.
Often you operate as a P.A., being taxed as a sole proprietor, an S Corporation, or a C Corporation, and under the tax codes you are limited to retirement account choices. The SEP IRA, Solo-401k, or the UNI-401k, all allow you to save on a tax-deferred basis; but the maximum contribution limit is still the same $49,000.00.
Now let’s explore the IUL and why it is a better choice.
With the IUL there is no limit on how much money you contribute, the money still grows tax-deferred, but with several advantages.
The money in your tax-deferred accumulation account can be used, through interest free loans, for the purchase of new equipment, to expand the practice, or just to carry you through a tough time. At retirement the money is paid to you in the form of tax-free loans against your account value. The income would be a lifetime income with no risk of loss in a down market, and at the end of the income, your death, the face amount of the life insurance policy would still go to your heirs as a tax-free death benefit.
All of the benefits listed above still apply to the business owner, but if you are an S Corporation, you could have the option of making the premium contributions as a draw against the profits of the corporation, and avoid the self-employment tax/social security tax , which would add to the benefits of the IUL. That alone is a 13.3% tax savings!
For a Business owner with a partner/partners that dies, you would have the need for a Buy-Sell Agreement to determine the value of the Buy-Out of the deceased partner/partners. The best way to fund the buy-sell agreement is through life insurance policies.