Generally speaking, one of the biggest and most complicated financial decisions you will make is deciding whether to purchase a life insurance policy. With numerous options available, such as term life, universal life, and whole life, each type offers its pros and cons. The goal of this article is to introduce a relatively new option – Equity Indexed Universal Life (EIUL).
Simply put, an equity indexed universal life insurance policy gives the policyholder the chance to invest the accumulated cash value into index options, such as the S&P 500.
What is Equity Indexed Universal Life Insurance?
An equity indexed universal life insurance policy is similar to a variable universal life insurance policy due to the fact that a portion of your premium goes towards insurance coverage and the remaining is invested. This makes an EIUL not just a life insurance policy, but a financial planning tool as well that offers numerous benefits.
Advantages of Equity Indexed Universal Life (EIUL)
If you decide to purchase an EIUL policy, it will provide the primary benefit of an effective financial plan. There are four key components of an EIUL that most individuals find appealing – death benefit, solid returns, tax benefit, and liquidity.
If you are looking into purchasing a life insurance policy, you are most likely concerned about your family’s well-being during the time of your passing. Life insurance coverage is especially important in the family with a single income. Many U.S. households consist of a partner who works full-time, while the other partner raises the children. Purchasing a life insurance policy will ensure the financial security of the surviving partner in the event that the head of household passes.
In a multiple-income household, expenses – mortgage, bills, car payments, uninsured medical bills – do not disappear once one income goes away with a death. Again, purchasing a life insurance policy helps to provide further financial security to cover such expenses after your passing.
When deciding how much the initial death benefit should be for your EIUL policy, consider how much income in the future will be needed to maintain your household compared to how much of a premium you can afford. The death benefit of the equity indexed universal life policy is paid directly to the beneficiary as tax-free income. Once you decide on how much death benefit is needed, ask an independent insurance agent to determine what your monthly premiums will be.
Solid Investment Returns
When paying your EIUL premiums, a portion of the contributions goes towards the actual insurance coverage (death benefit), and the remaining is invested. This cash value accumulates over time, giving the policyholder the ability to access these funds at any time via a policy loan.
As the policyholder, you are able to choose from a selection of index funds based upon your life expectancy and risk tolerance. Equity Indexed Universal Life policies have cap rates on both their downside risk and investment returns, with a floor of generally 0% and ceiling of 11-16%.
This 0% floor makes the EIUL an attractive investment strategy. Let’s say for instance you have $100,000 cash value in an account. Should the index option chosen decrease by 38% in a year (as the S&P did in 2008), the cash value will remain at $100,000 at the end of the year because of the 0% floor.
The lack of liquidity is one of the leading causes of bankruptcy. Funds inside an EIUL account can be accessed without taxation or penalties. Once income issues are dealt with, contributions can resume with little financial cost. Loss of employment is the leading reason individuals cash in their retirement plans and they are penalized severely by the government.
Is Equity Indexed Universal Life Insurance for You?
Every EIUL policy and customer is different, so be sure the performance of the plan works for you. Unfortunately, an EIUL is not a flawless investment vehicle. It is up to you, as the consumer, to weigh the pros and cons of each financial opportunity available and make the most informed decision. If you are searching for a life insurance product that provides tax-free income during retirement, you should consider an equity indexed universal life insurance policy.
Finally, always speak with a professional to get solid advice and learn the pros and cons of any insurance or investment product you are considering.