IUL Life Insurance in Texas
Indexed universal life insurance (IUL) is a type of life insurance that offers death benefit protection in the event of the policyholder's demise. It also has a cash value component that policyholders can withdraw from, borrow against or use to pay premiums while still alive.
If an IUL policy is designed correctly it can have the tax-free income to make it so-called living insurance. A major factor differentiating IUL from other Universal Life Insurance policies is how the earnings into the policy are delivered. In addition to the fixed account where the rate of earning is fixed policyholders can earth higher by the index account in the policy. IUL typically comes in two types:
Indexed Universal Life (IUL)
Variable Universal Life (VUL)
Indexed Universal Life (IUL) Insurance policy coverage includes death benefits and cash value if the correct option was used at the time of purchase. In contrast, IUL excludes death caused by suicide committed within two years of purchasing the policy.
Policyholders can add living benefit riders like critical care illness riders, terminal illness riders, accelerated death benefits (ADB), and long-term care riders to their Indexed Universal Life (IUL) Insurance policy. This allows policyholders to receive a payout from their death benefit while still alive. The living benefit is only allowed in cases of terminal illness or other long-term severe health problems.
What is Considered Indexed Universal Life (IUL) Insurance?
Like Whole Life Insurance, Indexed Universal Life (IUL) Insurance provides lifelong protection for policy beneficiaries at the policyholder's demise. IUL also allows the policyholders to decide the cash value amounts they want to put in their fixed or index accounts.
This policy offers a lot of common stock market indexes like the S&P 500 or the Nasdaq-100. Policyholders can borrow against their cash value and have a tax-free retirement income, but doing so will decrease the death benefit paid out to their beneficiaries upon their demise. Policyholders can also add living benefit riders to their IUL policy that can be used while still alive. Policyholders are at liberty to adjust their death benefits and payments within certain limits if their needs or budget change.
What is the Point of Indexed Universal Life (IUL) Insurance?
Indexed Universal Life (IUL) Insurance provides permanent death benefit coverage for the life of the insured. In addition to paying a death benefit, IUL also contains the possibility of cash accumulation via a stock market index and has a no loss provision as the nature of indexing feature. However, the growth is capped as the insurance company does not let you lose your cash-value account it also will not let you earn more than a reasonable rate. A certain minimum amount is guaranteed in IUL policies, but your returns are usually capped at a specific percentage of earnings.
What is Indexed Universal Life (IUL) Insurance for?
Indexed Universal Life (IUL) Insurance provides a measure of financial security for loved ones at an insured’s demise and a cash value tied to a market index, without loss. IUL policies are very flexible such that policyholders have the liberty to adjust their premium payments and death benefit. However, this can only be possible if sufficient amounts are in their cash values.
What are the Types of Indexed Universal Life (IUL) Insurance in Texas?
There are two major subtypes of Indexed Universal Life (IUL) Insurance:
Index Universal Life (IUL): a lifelong coverage that includes a cash value account that is linked to stock market index which grows tax-deferred with a unique feature of no market loss.
Variable Universal Life (VUL): is a lifelong insurance policy with an investment component where policyholders directly invested in the stock market and can have the market risk of loss or gain.
NOTE: What is the Risk of Variable Universal Life (VUL) Insurance Policy?
VUL is one of the riskiest policies to buy as one can lose the cash value in the market downturn. As the account is invested in the stock market, one can have the up swing gains from the market and at the same time one can lose the account value and growth in the downturn.
To see if this is the best fit for you one has to consult with a Securities State licensed investment agent who is a Certified Financial Fiduciary and make you aware of the market risk more so than the potential of gains.
Should you Buy Indexed Universal Life (IUL) Insurance in Texas?
If you want to secure the financial future of your family and loved ones then IUL may be the best option. This is because your policy will grow in cash value without market risk and give you access to your cash value tax-free.
Why Should you Consider Indexed Universal Life (IUL) Insurance?
You should consider Indexed Universal Life (IUL) Insurance as you will grow your cash value at a reasonable rate without the market risk. However, it is better to get an IUL at a young age so you can build wealth over time.
How Much Indexed Universal Life (IUL) Insurance Do you Need?
The amount of Indexed Universal Life (IUL) Insurance coverage you should get in Texas primarily depends on your needs. You can put at least 10-15 times your annual income in IUL Insurance coverage. However, you can decide to purchase more coverage if you have the future need and can afford the premiums. You can ask a Texas licensed insurance agent for clarity regarding the amount of IUL coverage that will best meet your needs.
What Indexed Universal Life (IUL) Insurance Coverage Do you Need?
The Indexed Universal Life (IUL) Insurance coverage to buy depends on your needs. IUL typically provides financial coverage to policy beneficiaries at the policyholder's demise. The death benefit obtained from the IUL policy can be used to cover any needs such as funeral expenses, medical bills, paying off a mortgage, daily needs, paying college tuition fees, tax-free retirement income etc. IUL also has a cash value component that the policyholder can withdraw from or borrow against while still alive. You can speak to a Texas licensed insurance agent if you are unsure of the best IUL insurance coverage that fits you. This agent will guide you about the available options and the most appropriate coverage that will suit your current and future needs.
Is Indexed Universal Life (IUL) Insurance Required by Law in Texas?
No law in Texas mandates Indexed Universal Life (IUL) insurance for anyone. However, having IUL insurance can help you meet the financial needs of your loved ones at your demise while also building cash value and can also meet your needs.
How Does Indexed Universal Life (IUL) Insurance Work in Texas?
When a policyholder pays a premium, a small part of the premium covers death benefits and fees. The rest of the premium is added to the policyholder’s cash account. Indexed Universal Life Insurance has similar characteristics as other Life Insurance policies, except that the growth of the cash value is linked to the performance of the stock market index with a unique feature of no market loss. Each insurer has a selection of indices that the policyholder can choose from. The policyholder can choose more than one from the list of indices available. The most common indices offered are the S&P 500, NASDAQ 100, and Russell 2000. Performance of indices is usually measured, excluding dividends. With Indexed Universal Life Insurance, the cash value can be invested in a fixed index account and an account linked to the performance of the stock market index with the unique feature of no market loss. The policyholder can simply let the insurer know what percentage of the cash value should go into each investment from then on, the insurer will keep track of the performance of each index. The cash value percentage can be reset or changed upon policy anniversary or some policies may have a two-year provision. Fixed rate account is set and will only earn the said amount in the bucket and that is a guaranteed return. On the other hand, index investment generally has a higher potential in terms of returns.
In a situation where a policy’s cash value growth is directly tied to the performance of an index, a few restrictions come into play. These restrictions are:
Minimum Guaranteed Annual Interest Rate - This interest rate, also known as “Floor,” is usually 0% or higher. The specifics of this depend largely on the insurer, and it means that the account would not suffer loss if the market crashes.
Maximum Annual Interest Rate - This return rate, also known as “Cap,” is generally tied to the index's performance, but the policyholder is not investing in the index. Therefore, insurers usually cap the maximum interest rate they will pay at around 10% or 12%. This means that if the market is up more than the maximum interest rate, the insurer will only pay the Cap amount.
Participation Rate - This is the percentage of the money invested in the index. Assuming the policyholder has $20,000 of cash value tracking the S&P 500 and the index has a 10% annual return, we can assume that the cash value increased by $2,000. That assumes a 100% participation rate. If the participation rate of the insurer was 50%, the cash value of the policyholder would increase by $1000; in other words, a cash return of 5% has been made ($20,000 x 50% x 10% = $1000). This can also grow more if, for example, you have a 120% participation rate then $20,000 can earn $2,400. If the account that year earned 10% on the $20,000 cash value ($20,000 X 120% X 10% = 2,400.)
The IUL policy typically credits the index interest to cash accumulations once a year or every two years or every five years. A policyholder may adjust the payment of their premiums by lowering their death benefit. A policyholder can borrow from their IUL after enough cash has accumulated but would be expected to pay interest on the loan. If the policyholder defects on payment of the loan, the amount owed can be deducted from their death benefit.
What Does Indexed Universal Life (IUL) Insurance Cover?
Indexed Universal Life (IUL) Insurance coverage provides death benefits to policy beneficiaries at the policyholder's demise. It also allows policyholders to build a cash value that they can withdraw from, invest, borrow against, or use to pay premiums.
What is Indexed Universal Life (IUL) Insurance Good for?
Indexed Universal Life (IUL) insurance is good for leaving money behind for your loved ones in the event of your death or plan for tax-free income. IUL is also good for building savings over time that policyholders can withdraw from, borrow against, or use to pay premiums. When the policyholder dies, the withdrawal amount or outstanding loans will be deducted from the death benefit paid out to their beneficiaries by the insurer. Speak to a knowledgeable Texas-based licensed insurance agent to know if IUL is good for you and how to plan for your personal and family needs to achieve your personal needs and goals.
What Does a Typical Indexed Universal Life (IUL) Insurance Include?
Generally, Indexed Universal Life (IUL) Insurance policy coverage includes death benefits and cash value if the correct option was used at the time of purchase.
IUL insurance also includes cash value from which policyholders may borrow from the cash value and may not have to pay the loan till death. Upon death at that time the insurer will decrease the death benefit payout and take the unpaid loan and any outstanding interest. Policy beneficiaries can use the death benefit on any of their expenses, like a mortgage, college savings, funeral expenses and tax-free income. Contact a knowledgeable Texas licensed insurance agent who can go over the IUL coverages with you.
Who is Covered by Indexed Universal Life (IUL) Insurance?
An Indexed Life Insurance policy in Texas covers the insured. Individuals looking for the opportunity to build wealth in addition to life insurance protection and want to plan for tax-free income for the future can consider this type of life insurance.
What is not Covered by Indexed Universal Life (IUL) Insurance in Texas?
Generally, Indexed Universal Life (IUL) Insurance does not cover death caused by suicide committed within two years of purchasing the policy.
What Does Indexed Universal Life (IUL) Insurance Typically Exclude?
Most IUL insurance policies cover most causes of death, including but not limited to old age and terminal illness. However, deaths caused by the following are not covered by most IUL policies:
Suicide: If an insured commits suicide within two years of purchasing the policy.
Misrepresentation: providing wrong information while applying for your IUL insurance policy could void your IUL coverage, and most insurance companies will refund the premiums paid upon finding out.
Risky activity: except if it was declared at the time of buying the policy and the underwriting approved the coverage or the risky activities are done on rare occasions.
What is an Example of Indexed Universal Life (IUL) Insurance?
Natasha is a 35-year old who wishes to retire at age 60. She has no other retirement accounts (qualified or nonqualified). She gets an IUL policy with a $1 million death benefit and pays $50,000 each year for the next 20 years into this policy. So, over the course of 20 years she pays in the amount of the death benefit, and then, at 55 years old she waits another 5 years for the policy cash value to grow, before she can tap into it. At 60 years old, Natasha can now get a substantial amount of life income from IUL insurance cash values each year - tax free. At age 65, when Natasha files for the social security benefits, the only income tax she will be paying for is social security income.
As an alternative example:
Jack is a 50-year old who places $1 million into an IUL policy as a lump-sum. (By placing $1M it will be a MEC policy and if he borrowed any cash value from the policy Jack will have to pay ordinary income tax on it - read more about MEC). The $1 million premium might buy him an initial death benefit of $3 million based on his health and age. The cash value of the premium paid is invested in an Index S&P account and if the stock market performs well, that death benefit could be above $4 million.
Make sure to discuss your options with a knowledgeable and experienced Texas-licensed life insurance professional with access to multiple insurers, who knows how to structure the highest possible life income and death benefit.
What is the Most Common Use of Indexed Universal Life (IUL) Insurance?
Indexed Universal Life (IUL) Insurance is typically used to provide death benefits to loved ones while building a cash value. The amount in your cash value account can earn indexing percentage as per the contract and performance of the stock market without any risk of market loss. Also, policyholders can borrow money from their cash value and if they have a terminal, chronic, critical care, and living benefit riders - they can get money out of the policy. They can also have tax-free income in the future. Policyholders can use IUL for business purposes such as business succession planning, estate planning, buy-sell agreement, and income replacement.
What is the Difference Between Indexed Universal Life (IUL) Insurance and Variable Universal Life Insurance?
The main difference between Universal Life and IUL insurance is how the cash value grows. Although both insurances have flexible premiums and adjustable death benefit, the Indexed Universal Life policy fund is invested in the stock market index. In contrast, Variable Universal Life Insurance can be invested in the stock market itself and one can lose the cash value if the market takes a downturn as all your cash value can be at market risk.
What is Better: Indexed Universal Life (IUL) or Variable Universal Life (VUL) Insurance?
Indexed Universal Life (IUL) Insurance and Variable Universal Life Insurance are permanent coverages that provide death benefits and cash value components. The best policy depends on your personal needs and goals to secure your family's financial future and your financial conditions.
Do I Need Indexed Universal Life (IUL) Insurance - FAQ:
Do I Need Indexed Universal Life (IUL) Insurance if I am Single?
Generally, you don't need life insurance if you have no dependents because no one relies on your income. However, you can use IUL to build savings and have a tax-free retirement plan for your retirement in the future with an addition of a death benefit that can be left to a charity of your choice. You can also access a part of the death benefit while still alive. Having an IUL is very important as a single person because you will need people to cover your funeral costs and any other expenses such as credit cards, mortgage, and other bills at your demise. You can opt for other life policies like Funeral Expense Insurance if all you want is financial protection against burial expenses.
Do I Need Indexed Universal Life (IUL) Insurance if I Have Term Life Insurance?
Yes. This is because the benefits you will get from each policy are mutually exclusive. For example, while the Term Life policy only provides death benefit when the policyholder dies within the term, IUL is a lifelong policy that has a death benefit and cash value component. Therefore, if you have Term Life Insurance, you can choose to convert it to an IUL policy if you want to build a cash value on your insurance and have a tax-free retirement income in the future.
Living Benefits of Indexed Universal Life (IUL) Insurance
Most Indexed Universal Life (IUL) Insurance typically comes with living benefit options. This is where policyholders can get funds from their death benefit while still alive. The amount paid out to the policyholder would be deducted from the final death benefit that the beneficiaries will receive after the policyholder’s demise. The common riders associated with living benefits are:
Critical Care Illness Rider: It helps the policyholder financially if diagnosed with any critical illness. These critical illnesses tend to shorten the insured’s lifespan or life expectancy. Critical care illness riders typically cover illnesses like major organ transplants, cancer, stroke, paralysis, heart attacks, loss of limbs, autoimmune diseases, major burns, and blindness.
Terminal Illness Rider: This type of rider allows policyholders to access their death benefit if they are diagnosed with a terminal illness. Examples of such illnesses could be heart disease, or advanced cancer.
Accelerated Death Benefit (ADB): This enables the policyholder to receive a portion of their death benefit from their insurer while still alive when diagnosed with a terminal illness. Many policyholders who choose this type of rider have less than two years to live and use the money for medical bills, drugs, and other expenses.
Long-Term Care Rider: This rider allows policyholders to access a part of their IUL policy's death benefit monthly to pay for long-term care expenses. Some conditions that might require long-term care are stroke, rheumatoid arthritis, Parkinson's disease, cancer, and Alzheimer's disease. To qualify for this type of living benefit rider, a medical professional will have to attest that the insured is:
Unable to engage in a minimum of two activities of daily living or,
Is cognitively impaired and would need a lot of supervision to protect their health and safety.
Family Income Rider: This death benefit rider provides the policy beneficiaries with a similar monetary worth of the policyholder’s monthly income at the insured’s demise.
Accidental Death Rider: The policy beneficiaries get an additional amount of money with the death benefit, if the policyholder with this rider dies due to an accident.
Tax-free Retirement Income: one can have a stable income tax-free and that does not lower your social security income or raise one's income tax as the income from IUL is tax-free via loan policy. One does not have to take the same income each month or each year as the policy owner controls the tax-free income that is needed. For instance, say you take a loan of about $30,000.00 from your policy this year as you need for home repairs or remodeling and don't need any money for the next 2 years. In the 4th year you need to buy a car and need to loan about $50,000.00 for the purchase of the car. If you have enough cash value to borrow you can do so as you control your cash value and do not have to pay back while you are alive.
An IUL policyholder suffering from a critical or terminal illness with living benefit riders can get up to 25% of their death benefit. For instance, on a $2,000,000 policy, the policyholder can get $500,000 from their death benefit while still alive. Ideally, the insured must be terminally ill and have about two years to live. This living benefit allows the policyholder to use the money to meet medical costs and other critical needs. The amount given to the policyholder would eventually be deducted from the actual death benefit that would be paid out to the policy beneficiaries.
Can you Lose Money in an Indexed Universal Life (IUL) Insurance?
Generally, you won't lose money when the market has a downturn because a guarantee applies to your fixed account, insuring it against losses. The cash value in an IUL will not decline as the indexing of the policy provision is capped (ceiling can be about 10% or 12%) and (floor of 0 or 2%). Even if the market declines, you won't still lose any cash from the policy, only the cost of insurance will be deducted from the policy cash value.
Problems with Indexed Universal Life Insurance
One major problem with Indexed Universal Life (IUL) Insurance is that market return is not guaranteed. Hence, one may not earn the same percentage each year and has a cap on the percentage of earning. Since you never lose any cash value due to a market downturn you also do not earn the total of the upmarket.
Does Indexed Universal Life (IUL) Insurance Increase with Age?
Yes. All life insurance costs increase with age so does the IUL policy. It is always better to buy at a young age and lock in your insurability and rate. If the policy is bought at a young age it has the potential to grow the cash value and a higher death benefit.
When Does Indexed Universal Life (IUL) Insurance Coverage Begin?
Most times, Indexed Universal Life (IUL) Insurance coverage begins as soon as payment has been given to the State of Texas licensed agent with the condition that all information provided on the application is accurate. Once the medical and financial underwriting is done the policy is approved and issued. One can loan from the policy whenever there is enough cash value. If one borrows a large amount and the cash value has a minimum amount left in the policy one may have to start paying the loan back. This would help them have a better chance of growing the cash value for any further need in the future.
Who Can Get Indexed Universal Life (IUL) Insurance in Texas?
Anyone that is determined insurable by the insurer can get IUL. This policy is an effective option for individuals looking for financial security for their loved ones in the event of their demise. Also, the indexing provision that has a no-loss future helps them grow cash value tax deferred and withdraw tax-free without having to worry about market conditions. Speak to a Texas licensed insurance agent to know if you are eligible for this policy.
Who Qualifies for Indexed Universal Life (IUL) Insurance?
Anyone qualifies for Indexed Universal Life (IUL) Insurance. Individuals of all ages and incomes can buy IUL coverage to protect their loved ones in the event of their death. Additionally, people with high income can purchase this policy to provide tax-free wealth accumulation. Generally, these policies are best for those looking to secure the financial security of their family and loved ones or want to build a tax-free income in the future.
Who Needs Indexed Universal Life (IUL) Insurance?
Indexed Universal Life (IUL) Insurance is for individuals who want to use their Life Insurance plan as a means of safe security for their family and loved one's financial future. They can do this along with growing their cash value at the most secured means without any loss of the market risk. This is possible because IUL policy comes with a cash value component that is tied to the market index that policyholders can use to build wealth. Individuals who need to provide security for a spouse, children, or other family members in the event of their death can also get IUL. Depending on the policy amount, the death benefits from this policy can help beneficiaries cover college tuition fees, pay off a mortgage, or help fund tax-free retirement.
Who Should Get Indexed Universal Life (IUL) Insurance?
Individuals who want life insurance to secure their loved ones from financial difficulties in the event of the breadwinner's demise should get IUL. In addition, someone who wants flexibility in adjusting death benefits and premiums and is comfortable having no financial risk of investment may find an IUL policy appealing. Talking to an experienced Texas insurance agent would help you decide if indexed universal life insurance is a good fit for you.
What are the Benefits of Indexed Universal Life (IUL) Insurance?
One of the significant benefits of an Indexed Universal Life Insurance policy is that policyholders can take advantage of stock market returns without the risk of loss. This policy does so while building up a death benefit and cash value that policy beneficiaries will receive tax-free. Policyholders are at liberty to withdraw from their cash value and the death benefit (if they have living benefit riders.) Speak to a Texas-based licensed insurance agent to help you better understand how IUL will benefit you and determine what kind of coverage best fits your needs.
PROs and CONs of Indexed Universal Life (IUL) Insurance in Texas
The PROs and CONs of Indexed Universal Life (IUL) insurance in Texas are listed below:
PROs of Indexed Universal Life (IUL) Insurance
There are several advantages of including Indexed Universal Life Insurance (IUL) in your financial plan.
It offers greater flexibility to policyholders such that they can choose the amount of risk they would like to take in the market. They can also choose among several riders such that the policy can be tailored to their needs.
It provides a death benefit for your beneficiaries tax-free. This money can be used to cover funeral expenses, debts, pay college tuition fees, and daily living expenses.
IUL policy typically comes with no risks because there is no direct investment in the stock market.
Policyholders can access their cash value amount at will without any penalty, regardless of their age.
It provides living benefits riders that allows policyholders to access their death benefit while still alive.
CONs of Indexed Universal Life (IUL) Insurance
There are several drawbacks associated with Indexed Universal Life (IUL) Insurance policies, such as:
IUL insurance policies can come with administrative fees and surrender charges which can reduce the value of the rate of return offered by the policy.
It can be more expensive in the short-term compared to Term Life insurance but becomes much cheaper in the long run as it has a cash value growth without market loss worry/potential loss.
The amount of percentage on your account is capped.
Is Indexed Universal Life (IUL) Insurance Worth Buying in Texas?
Indexed Universal Life (IUL) Insurance is worth buying because it provides a cash payout for policy beneficiaries at the policyholder's demise alongside cash accumulation via the stock market index with no loss from market volatility. Policyholders can borrow cash from their cash value to meet financial needs like home renovation, business operations, college tuition fees, paying off mortgage and tax-free retirement income. IUL also has a living benefit advantage where policyholders can withdraw from their death benefit while still alive. This opportunity is usually given to policyholders who need long-term care or are battling a critical or terminal illness. Speak to a Texas licensed insurance agent to determine if the IUL policy is a good fit for you.
What Happens if you Don’t Have Indexed Universal Life (IUL) Insurance?
It is not good to be without Indexed Universal Life (IUL) Insurance and no savings or investment in place for your loved ones in the event of your demise. You might leave them with a lot of strain such that they would find it difficult to take care of themselves and take care of your funeral or medical bills. If you do not desire financial difficulty for your loved ones at your demise, make sure to get an IUL insurance policy while you are alive.
Why is Indexed Universal Life (IUL) Insurance Important?
Indexed Universal Life (IUL) Insurance is important because it provides death benefits for policyholder beneficiaries at the policyholder’s demise. In addition to that, policyholders can build wealth in cash value that they can withdraw from while still alive. IUL is a very flexible policy where policyholders have the liberty to choose the amount of risk they would like to take in the stock market. They can adjust death benefit amounts and premium payments at will and choose among numerous riders that make the policy tailored to their needs. Anyone can get IUL as long as they desire lifelong protection with death benefit and a cash value component. Policyholders with living benefit riders can use out of their death benefit while still alive, but the amount would be deducted from the final death benefit paid to their beneficiaries at their demise.
What Happens When your Indexed Universal Life (IUL) Insurance Lapses?
Generally, Indexed Universal Life (IUL) insurance policy lapses when policyholders refuse to pay premiums, and there is no money in their cash value. However, missing one payment won’t lead to loss of IUL coverage. Insurers typically offer policyholders a grace period to pay premiums from the due date. During this period, the IUL policy will still be active such that if policyholders die their beneficiaries would still get the death benefit. However, the insurer would most likely deduct the premium payment owed by the policyholder from the death benefit. When policyholders miss payment, the best thing to do is to call your insurer to pay what you owe or what you can afford at the time and work with the insurer. Also, always discuss your payment options with your insurer each time you cannot afford to pay your premiums.
Once policyholders’ IUL policy lapses and is not reinstated, they will no longer have coverage, and their beneficiaries might not get a death benefit to their beneficiaries at their demise. Instead, the insurance company can use the insured’s cash value to cover missed premium payments. Policyholders may be able to reinstate their policy when it lapses, and there is no money in their cash value, depending on how long it lapsed. Many insurers offer about a 15 to 30 days buffer after a policy lapse to reinstate it without going through an elaborate or complicated procedure. After that, policyholders will likely have to pay the premiums they missed. Finally, even though policyholders can take steps to reinstate a lapsed policy, the best course of action is to avoid lapses. Engage your Texas-licensed insurance agent regularly for coverage review to avoid defaulting on premiums.
