This policy is one branch of the enduring life insurance tree, meaning it has a cash value on top of the death benefit. Funds surrendered to the cash account are multiplied by a stock market index that is chosen by the insurance provider like the S&P 500 or NASDAQ composite index.

To get the exact index rate, you would have to contact providers for a consultation. Be sure to use a vendor who does not charge for the consultation, such as AfriKare Life. You will be able to browse different products before having to contact them and even get a free quote for your desired instrument.

Key Characteristics of Indexed Universal Life Insurance

• No established interest rate. Upon purchase of your indexed universal life insurance, money in your cash value account does not earn a steady interest rate. Rather, as stated above, your rate is determined by a market index selected by your provider. The index monitors the ups and downs of a particular group of investments. Your vendor chooses the index and uses it to compute interest rates dependent on performance. The provider will then deposit the accruement to your cash value account at the selected intervals.
• Interest rate assurance. Some security is provided as there is a minimum interest rate you will benefit from even if the index yields smaller returns. However, it is important to note that there is also an upper limit where you will not accrue interest above a certain level. The two levels are called the floor and the cap.
  • Floor. This is the lowest rate at which you will accrue value. When placed at 0%, it protects you from losses if the market dips lower than that.
  • Cap. Your cash value will not accrue interest over a certain limit. For example, if your cap is 8% and the index is at 12%, your cash will only accrue interest at 8%.
• Workable remissions & benefits. Indexed universal life insurance comes with the choice to adjust both your benefits and premiums. When you accrue sufficient value in your account, those funds can be applied to cover policy payments and expenses. Should you decide to miss a payment or have some cash flow issues, the insurance payments and policy charges will be drawn from your cash pool. This keeps the policy alive and the death benefits in play should you run into some hiccups provided you have surpassed the required cash value.
• Participation tariff. Insurance providers have what is known as a participation rate that they determine themselves. This rate determines how much of the index’s return is distributed to your account. When it is 100%, that means you will earn the entire interest accumulated by your cash at your pre-determined cap.

Say your insurance vendor has a participation rate of 50%, and the index is at 10% that month. You will earn 50% of the 10%, which is 5%. It is worthwhile noting that the accumulation is monitored monthly. However, disbursements are made either once a year or every half-decade. Though accruements and expenses are calculated and deducted monthly, the cash proceeds are only distributed after the chosen period.

Universal Life Insurance and Tax

It is possible to withdraw the cash value from your indexed universal life policy with no tax burden, but not in all instances. One scenario with no tax is when you want to access your cash up to the amount you have contributed to the policy. Gaining access to amounts that include the gains made on your cash value will incur income taxes.

Premiums, however, tend not to be tax deductible but disbursement of funds to beneficiaries is usually free of tax.

Using your cash value as collateral for a loan may well lead to a taxable event. You may take out a loan against your cash value that is tax-free. However, when the loan interest is allowed to end in the prevailing cash, the policy can fail, making you liable for taxes on the loan.

When receiving Social Security benefits, loans against your policy do not count for the computation of taxes on benefits received.

IRC Section 1035 allows you to turn in your policy for an annuity with no income tax obligation. This is perfect for people who do not need the policy anymore but foresee a desire for income in the coming years.

What Is Wrong with Indexed Universal Life?

• High management fees. Participation fees alone will at times cost you between 0% to as much as 25%, making sure you rarely get full gains. IULs are infamous for their sleuth of expenses. From administration fees, sales deductions, insurance costs, commissions, surrender fees, and others, you are paying a small fortune in expenses. They also drive up your premiums and limit the speed at which you can increase your value.
• Rate caps may limit performance. In addition to participation fees, your index rate is capped, and you cannot earn past a certain point even on a good year.
• Infamous for limited policy disclosure. In presentations, you will see a lot of projections of interest rates, expenses, policy growth, and more. Because neither you nor your vendor can predict the future, the numbers used have to be fictional and are often optimistic, to say the least. They often fail to include fees and rate caps focusing on the dopamine highs of cash value accruement to blind you. Pay attention to the floors, caps, and participation fees, and ask for a breakdown of all the expenses associated with the policy. Take a few weeks to do proper research even.

Can You Lose Money on an Indexed Universal Life Insurance?

IUL policies present good methods to accumulate money in a cash account subject to a market index. It may not yield much, but it is primarily an insurance policy and not an investment product.

The floor rate protects your principal cash value from losses should the market have a downturn. A decent indexed universal life policy should have floors at between 0% and 1%.

Is IUL Better Than 401k?

There is no universal answer to this question, it rests on the individual’s needs. 401(K)s and IULs have some similarities but what will help you decide which is better are the dissimilarities.

• Indexed universal life insurance. Investors who need a death benefit and a tax-leveraged way to build value favor IULs. You will also get the advantage of being able to borrow against your cash value.
• 401(k). 401(k)s provide more investment options than IUL that include but are not limited to:
  
  1. Commodities
  2. Government debt
  3. Mutual funds
  4. ETFs
  5. Money market funds

If you prefer paying premiums via payroll deductions, then a 401(k) is the way to go.

A good provider like AfriKare can guide you through what options are available for what your needs are and they will also have alternative products. If you are a young adult and have dependents, many have gone for life-term insurance, which is the most affordable.

Term life has also found favor with young professionals looking to build their career via further education. This would be perfect for a college fund. Further products exist for senior citizens with concerns about costs associated with the end of life. Final expense insurance from AfriKare allows you to plan for funeral and hospital expenses in advance.

AfriKare is actively helping people of color build generational wealth and has a silent commitment to serving the African American community. They especially love working with young couples of African descent.

When Can You Withdraw From an IUL?

Another key difference between the IUL policy and a 401(k) is that there is no age cap to gain access to your money. However, the ability to dip into your value is determined by the policy design and may differ from provider to provider.

Some vendors are flexible and allow for early-stage access, while others require you to have contributed for a much longer period.