Indexed Universal Life (IUL) insurance is frequently marketed as a cash value insurance policy that allows you to profit from market gains tax-free while avoiding the danger of losing money during a market collapse. Indexed universal life insurance is permanent life insurance that contains both a cash value and a death benefit component. The cash value account earns interest depending on the insurer’s stock markets index, such as the S&P 500 or the Nasdaq Composite.
How It Works
Funds in your cash value indexed account do not receive a fixed interest rate when buying indexed universal life insurance. Instead, your insurer chooses the index and then calculates an interest rate depending on the index's performance.
Most plans have an interest rate guarantee, ensuring that a minimum interest rate is paid even if the index returns get lower. On the other hand, there are also limits on returns. Regardless of how well the policy’s index performs, these restrictions can cap the actual rate of return to your account. Then, someone who establishes the policy over a time when the market is performing poorly could end up with high premium payments that don’t contribute to the cash value.
Overall, Indexed Universal life Insurance is riskier than fixed options, but it suggests such advantages as higher return potential, greater flexibility, and tax-free capital gains.
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