Indexed Universal Life: THE CASE FOR BUYING YOUNG
The Huffington Post recently ran an article highlighting the top 40 financial things everyone should know by the time they hit 40.
The items ranged from the basic — creating a budget and pulling a free credit report — to the complex, like determining a health care proxy and assessing the tax implications of your retirement plan.
And, of course, life insurance made the list.
As the article points out, life insurance is important to everyone, even those who don’t have kids. And for young people, indexed universal life insurance (IUL) can offer benefits beyond just providing financial protection for loved ones in the event of a death.
Here are three ways an IUL can benefit under-40 consumers:
1.) A permanent death benefit. In their 30s and 40s, consumers typically start their own families, buy houses and begin saving for their children’s college tuition. If an untimely death should occur, the death benefit provided by an IUL can help ensure that spouses and children are provided for, mortgage payments continue to be made, and college savings are maintained*. In addition, a permanent death benefit product protects the client from changes in health in the future. Since this product can offer guarantee death benefit for life (based on premium payments and rates of return on the index), the death benefit will not expire like term insurance.
2.) Cash value accumulation. With an IUL, a portion of the premium is saved to a cash account, where it is credited with interest based on increases in an equity index*. That money builds over time and can be tapped in the future for emergencies, retirement expenses and other needs*. Buying a policy early in life gives the account more time to grow. In addition, using tax free loans to generate tax free income can be a hedge if tax rates rise in the future*.
*Guarantees are backed by the financial strength and claims paying ability of the issuing company.
*The interest credited is limited by either placing a cap on the amount of interest that can be earned (“cap” rate) and/or requiring a specified rate that must be surpassed within the index before interest will be credited (“spread rate”).
*The withdrawals are subject to contingent deferred sales charges and may also have additional fees defined by the policy. Withdrawals will permanently lower the death benefit of the contract at the time of the withdrawal. Withdrawals are taken out premiums first and then gains, so it is possible to take a tax-free withdrawal from the values of the policy (this assumes the policy is not a MEC, i.e. "modified endowment contract"). Withdrawals are considered a material change and cause the policy to be tested for MEC. As a result of a withdrawal, the policy may become a MEC and could lose its tax advantages.
4Policy loans and withdrawals will reduce available cash values and death benefits and may cause the policy to lapse, or affect guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change and you should consult a tax professional. Policy loans are not usually subject to income tax.
3.) Flexibility and lower risk. After living through the financial crisis and resulting recession, many young people are hesitant to take their chances on the stock market. A recent Wells Fargo survey found that more than half of people between the ages of 22 and 32 were not confident in the stock market as a place to invest for retirement. An IUL offers young adults a less scary starting point for re-entering the market. The policy’s cash value is not directly invested in the stock market, so policyholders can benefit from upside potential with fewer risks.