A lot of people are being encouraged to own Indexed Universal Life policies or “IULs”. IULs are life insurance policies that grow a cash value over time – similar to a whole life insurance policy. However, unlike whole life insurance policies, IUL cash values don’t grow with a fixed rate of interest. Instead, they have a feature where the interest rate that the insurance company pays can be “linked” to a stock market index such as the SNP 500. IUL policies provide greater upside when the index rises, but are guaranteed to protect the principal and not go into the negative if the index falls.

What’s more, IULs typically have flexible premiums. As long as you pay a minimum amount of premium, the policy stays in effect. This is opposed to many whole life policies that might lapse if the higher monthly (or annual) premium is not paid in full.

Are you considering an IUL? Here are some pros and cons:

Pros:

1. Upside growth when indices rise, but protected against loss when they fall
2. Tax-free growth (it is after all an insurance product, not an investment vehicle)
3. Cash value can be accessed via a policy loan, similar to a whole life policy
4. Flexible premiums

“IULs typically have flexible premiums.”

Cons:

1. Your money only grows based on the prices of the stocks in the index. You do not benefit from dividends or stock splits as you are not actually invested in the market.
2. As you get older, the cost of your life insurance rises significantly faster than in a whole life policy which means that less of your premium goes to cash value over time and your death benefit is smaller in later years than it would be with a whole life policy
3. The flexibility of the premium payments means that there is a chance of the policy being underfunded if you only pay the minimums and you may end up “underinsured” over time.
4. There are lower guarantees than in whole life insurance policies. Illustrations for these policies show “upside” projections based on insurance company assumptions that are not guaranteed.

So what does all this mean?

Well, there are specific situations in which an IUL policy makes financial sense for an individual. However, in many scenarios, people are better off owning a whole life insurance policy instead. This is because the benefits of introducing an element of uncertainty into an insurance product may be limited when most people’s money portfolios are already exposed to market risk.

Want to learn more? Feel free to book a consultation with me to see if this product makes sense for your financial portfolio.