While offering a wide range of benefits, indexed universal life insurance (IUL) policies can be confusing.
Which index should you choose? Which indexes are an option? Are IULs even a good investment?
Today, we’ll answer all these questions and more.
List of Stock Market Indexes
This index tracks the top 500 companies in the American stock market. Market capitalizations are what help to determine whether a company is included in the list. Companies must have common stock listed on the NASDAQ, CBOE BZX Exchange, or the NYSE.
S&P MidCap 400
You’ll also have heard this fund referred to as the S&P 400. This index tracks stocks from the S&P Dow Jones Indexes. This index is watched closely as a way of monitoring the health of the mid-cap equities market in the US and is the most popular of all the mid-cap indexes.
Dow Jones Industrial Average
You may also have referred to this as the Dow. This index tracks the performance of 30 big, publicly-held companies from the United States. Current prices are tracked, and so are trends over specified periods.
NASDAQ tracks 103 equity securities, each of which is issued by non-financial companies. The securities of 100 of these large non-financial firms are taken into account. The companies must appear on the NASDAQ, and the index is weighted by modified capitalization.
Euro Stoxx 50
This index tracks Eurozone stocks and was designed by Deutsche Börse Group’s Stoxx. Stoxx is an index provider. The company states that it aims to focus on supersection winners within the Eurozone. It focuses on blue chip companies and consists of fifty highly liquid stocks from the largest firms.
Russell 2000 Index
The Russell 2000 index is based on small-cap stock. It focuses on the lowest 2,000 stocks as determined by the Russell 3000 Index. FTSE Russell, the firm that maintains this index, is owned by the London Stock Exchange Group.
Multi-Index (A blend of the S&P 500, Russell 2000, and the EURO STOXX 50)
With a multi-index fund, you don’t have to choose a particular index. The fund will track several of the leading indexes.
High-Participation Rate S&P
S&P indexes are float-weighted which means that the number of shares being made available to the public has an impact on the market capitalization value. A high-participation rate S&P means that your interest will more closely follow the interest earned in the market.
Whereas some companies pay half, or a quarter of the actual gains made by the market, with this kind of plan, you’ll usually get closer to 100 percent or possibly more.
BNP Paribas Momentum 5 Index
The BNP index works slightly differently because it is rules-based. It aims to measure how hypothetical investments in a range of different asset classes in different regions might be valued.
It is centered on three guiding principles:
- Risk Control
- Dynamic Allocation
Bloomberg US Dynamic Balance Index II
Bloomberg monitors how well an allocation strategy that crosses the Bond and Equities asset classes perform. They have designed a quantitative model that weights certain features to improve the validity of results overall.
IUL Retirement Savings Strategies
With all the retirement investment savings products out there, you’re probably wondering why on earth we’re putting another one out there.
This kind of strategy will make sense for those with large IRAs.
The problem with large IRAs is that, left as is, you end up having to pay a lot of tax on them in the future.
An IUL offers unique tax advantages that are not present in any other single product.
If you are concerned about a future problem with taxes, this plan could be the solution.
It’s Good for Tax Planning
This plan helps you save on taxes. You can grow the money tax-free.
After retirement, you are also allowed to take cash distributions from the cash account, tax-free.
You can even transfer it to another policy without having to pay taxes.
Upon your death, the funds are transferred directly to the beneficiary, without forming part of your estate.
That means that no death duties will be payable on the money.
We all know that the stock market can show some nice gains, but what if you don’t want to risk your capital by investing in the market?
IULs offer an alternative. These funds track a specific index on the stock market, but your money is not actually invested there.
If there is a gain in the index, your interest rate will reflect that.
If there is a loss, you don’t get interest, but the capital value is not affected.
With these plans, even if the stock market were to tank tomorrow, your money would be safe.
It Offers Flexibility
401(k)s and IRAs have strict limitations when it comes to how much you can contribute per year.
Which makes it harder to bolster your retirement savings—this is not the case with an IUL. There are no limitations on contributions.
Another advantage is that the cash value is always available to you when you need it.
You can give notice to withdraw it at any time, without any penalties.
You have a lot of flexibility in terms of how much money to add to the cash account, what investments to make, and what your death benefits are.
If at any stage, you want to stop paying your premiums, these can be drawn from the cash value to ensure that the policy doesn’t lapse.
The interest earned on the cash value is either paid annually into the cash account or after a predetermined number of years.
Distributions from the cash account can be requested at any time and will not result in penalties to be paid.
Is an IUL a Good Investment?
Right about now, you might be thinking, this sounds a little too good to be true. And, to be fair, it does seem like a great deal.
- Access to gains in the stock market without risking your capital
- Unlimited contributions that are not taxable as long as it does not end up creating a MEC
- Flexibility when it comes to premium and coverage
- Access to your cash account as and when you need it
- A cash value accrual as well as a death benefit
There are other ancillary benefits to be considered with these plans as well.
- A potential living benefit – where you borrow against their policy and use the funds while you’re still alive. If you get diagnosed with a terminal illness, for example, this could be helpful.
- Upon your death, the money is paid out to your beneficiary without forming part of the estate.
- Your premium is a little less expensive because you’re assuming the risk when it comes to returns. A company that guarantees a return of 5 percent has to pay whether the market performs or not. In this case, they only pay according to gains in the market.
So, sure, the benefits are pretty impressive. That said, this is not a product that will suit everyone.
Here are some of the downsides:
- This is a complex product that needs to be well understood before being tackled. As a result, it’s a good idea to consult an independent broker who can look over your entire portfolio to ensure that it’s right for you.
- The companies sometimes offer capped interest rates. Let’s say that they set the cap at 20 percent, the maximum amount you’ll receive is 20 percent, even if market gains are double that amount.
- Also, the participation rate might be less than 100 percent. This means that the company may pay as little as 25 percent of the gains the market has made. So, let’s say that the market gains 20 percent, but your participation rate is only calculated on 75 percent of that total. You’ll receive a net gain of 15 percent.
- The argument is somewhat moot unless you’re dealing with a policy that has a higher face value. If not, there wouldn’t be much difference between this and a standard universal life plan.
- If the market gains ground, you win. If it loses ground over a particular period, you could receive no interest at all. Hopefully, the gains will exceed losses over time, but there is a possibility that might not see the returns you were hoping for.
So, is it a good investment or not?
That’s going to depend on you, and what your current portfolio includes.
It also depends on your appetite for risk.
If you invest directly in the stock market, your gains are all yours, and you could stand to make a lot of money.
If, on the other hand, the stock market crashes, your capital is gone.
The IUL offers an alternative for those that are more risk-averse.
You don’t have to risk your capital. It’s important not to rush this decision, though.
In the unlikely event that the equities being tracked lose value over each period while the policy is in force, you’ll end up with no interest earned on your money.
It’s not likely to happen, but it’s important to understand that it is something that might happen.