A universal life insurance policy is a mixture of a permanent life insurance policy and an investment account. So why not just get a term policy, and invest on your own? Good question.
Here are a few reasons why people opt for an IUL policy instead of buying a term life policy, and investing on their own:
People of all ages buy universal life insurance, but it's most popular for individuals mid 30's and older. A universal life insurance policy allows you to combine the convenience of permanent life insurance with a tax-free investment account, without much of the hassle.
It may take a few years before the policy actually starts to accumulate interest, but once it does, it accumulates year after year. This allows for long-term growth of wealth.
Imagine being able to supplement your retirement with a life insurance policy you bought 20-30 years ago. It's one of the biggest reasons opt for universal life insurance.
One of the biggest costs in our lives are loans. The interest we pay typically far exceeds the gain of any sort of investment. You can use the built up cash value to pay off your vehicle, your home, or other loans.
If there's no need for you to access the built up cash-value, you can simply leave it alone. Once you pass away, any built up cash value will be added to your death benefit and paid to your beneficiaries.
Universal life insurance comes in a few different types, with important differences.
These policies generally accumulate cash value more slowly than the other types do but they’re also safer, as the cash value accumulates in money market accounts. Many people use this type of policy to supplement their retirement income needs by taking loans against the policy after retirement.
Indexed life insurance policies policies are invested in index funds that usually follow the S&P 500 or a similar equity index. Many of the features and options of an indexed policy mimic those of a traditional policy; the biggest difference is that the gains are usually larger. These policies are usually used to augment other investment options in a long-term strategy, combining protection with growth of wealth.
This type of policy focuses on gaining more cash value faster, by riskier investments in equities and bonds. While more cash value sounds attractive, you're also risking losing your cash value. In some cases, the cash value that was built up for years can be wiped out in just a few months in a bad market since there is no floor. Most people avoid this type of universal life insurance.
Guaranteed universal life resembles a term life insurance policy the closest. They offer little to no flexibility, and build little to no cash value. However, this policy is more affordable than other universal life options, and it still covers you for your entire life.
Unless you are a seasoned investor that is looking for aggressive growth to build tax-free wealth, we recommend an indexed universal life insurance policy. It has the healthiest balance between cost, growth and flexbility.
An Indexed Universal Life (IUL) Insurance policy allows for various investments, including the S&P 500, which has shown an average annual return of 10%-11% since 1926.
