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10 Myths About Indexed Universal Life (IUL)

Indexed Universal Life (IUL) is a type of permanent life insurance that provides a death benefit along with the potential to accumulate cash value. However, there are several myths and misconceptions about IUL that can lead to misunderstandings about its features and benefits. Here are ten of the most common myths about IUL:

  1. IUL is just another type of stock market investment: IUL uses a portion of the premiums paid to participate in market index returns, but it is not a direct investment in the stock market.

  2. IUL is too complex to understand: While IUL can have more moving parts than term life insurance, a financial advisor can help explain the details and how it can fit into an overall financial plan.

  3. IUL guarantees a certain rate of return: While IUL is designed to track the performance of a market index, it does not usually guarantee a specific rate of return. Some policies, however, have guaranteed bonuses that are applied to the cash value after a set number of years.

  4. IUL is only suitable for wealthy individuals: IUL can be appropriate for a range of individuals and families based on their financial goals, risk tolerance, and insurance needs.

  5. IUL has high fees and charges: While IUL can have more fees and charges than term life insurance, it can also provide more potential benefits, including tax-deferred growth of cash value. Ideally, the cost of insurance paid should be less than the anticipated income tax that could be paid using other methods. This can generally be achieved by overfunding the policy to the IRS limit.

  6. IUL is a always tax-free investment: While the growth of the cash value in an IUL policy can be tax-deferred, withdrawals and policy loans may be subject to taxes if the policy is fully surrendered. In order to avoid paying income tax on amounts above your cost basis, the policy must stay in force until death. Some insurance companies have riders (frequently called an "Overloan Protection Rider" or similar) that prevent the unintentional collapse of a policy caused by taking too many policy loans. These riders are essential in ensuring that a taxable event never takes place.

  7. IUL is a risk-free investment: As with any investment, there is a risk of loss with IUL, including the possibility of not earning the indexed rate of return or declining market conditions. While IUL offers a zero-loss guarantee, cash value may be reduced if premium amounts are not enough to cover the cost of insurance, among other factors, which is why it is best practice to always overfund IUL up to the IRS limit (MEC premium).

  8. IUL is only for young individuals: IUL can be appropriate for individuals of any age, including those who are closer to retirement and seeking a stable source of retirement income.

  9. IUL is a one-size-fits-all solution: IUL policies and strategies can vary, and it's important to find the one that best fits an individual's unique financial situation and goals.

  10. IUL is not regulated by the government: IUL is regulated by state insurance departments and is subject to state and federal insurance laws.

It's important to separate fact from fiction when evaluating whether IUL is the right choice for your financial plan. A financial advisor can help provide guidance on the benefits and drawbacks of IUL and other insurance options.

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