5 Reasons Not to Buy Indexed Universal Life Insurance

What if I told you there’s a tax-advantaged investment product that lets you participate in the upside of the stock market with essentially zero chance of losing money? That’s the elevator pitch for indexed universal life insurance. Sounds great, right?

Indexed universal life insurance (IUL) is an insurance product that seems to promise you can have your cake and eat it, too. The devil is in the details, and when you really examine them, it becomes clear that these are products designed to be sold, not bought.

What Is Indexed Universal Life Insurance?

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Indexed universal life insurance is similar to the more familiar whole life insurance policy in that it is composed of two basic pieces: first, a permanent insurance policy that will pay a death benefit whether you die young or old;

And, second, a cash value account from which you can borrow money tax-free (but not interest-free) in order to pay for expensive items, educational expenses, or your retirement. The difference lies in how the cash value account grows.

In a whole life policy, the insurance company determines the dividend rate. Each year, this announced rate is multiplied by your cash value and the product is added to your cash value.

IUL vs Whole Life

The insurance company is the sole determinant of what that rate will be, but it is generally considered to come from a combination of the insurance company’s portfolio returns, surrender fees, and the extra money available when people live longer than actuaries project.

With IUL, the crediting rate for your cash value is determined by a formula, instead of being at the insurance company’s discretion. The specific formula is outlined in the policy documents, but, in general, is related to the performance of the stock market.

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