In-Depth Look at the Informal Funding Vehicle
Indexed Universal Life (IUL) insurance policies are growing in popularity among individuals looking for a reliable investment option that offers both protection and growth. This blog by NQP Consulting LLC will explore why IUL insurance is a valuable choice for meeting benefit obligations and how it works to maximize investment returns.
Why Choose Life Insurance?
The informal funding vehicle that best meets the obligations of sponsors to participants is high cash value IUL insurance policies. This selection is due to their ability to provide a high projected benefit obligation, a lump sum death benefit promise, and both pre-/post-benefit age death benefits.
High Projected Benefit Obligation
IUL policies are structured to meet significant future financial obligations. They are designed to ensure that benefit promises made today will be met in the future, providing peace of mind to policyholders and beneficiaries alike.
Lump Sum Death Benefit Promise
One of the defining features of IUL insurance policies is the promise of a lump sum death benefit. This ensures that beneficiaries receive a substantial payout upon the passing of the insured, providing financial stability and support during a difficult time.
Pre-/Post-Benefit Age Death Benefit Promise
IUL policies provide a death benefit promise that extends both before and after the benefit age. This means that regardless of when the insured passes away, the beneficiaries will receive the promised death benefit.
Nature of the Investment
IUL insurance policies combine two key components that benefit policy owners:
Death Benefit Component
This is similar to traditional life insurance policies, providing a lump-sum payment to beneficiaries upon the insured’s passing. The death benefit serves as a financial safety net, ensuring that loved ones are taken care of financially.
Cash Value Component
Unique to IUL policies, the cash value grows over time, creating consistent year-over-year returns on the investment. The cash value can be accessed by the policyholder through loans or withdrawals, offering flexibility in managing financial needs.
Benefits of IUL Policies
IUL insurance policies offer several advantages:
Tax-Free Income
Growth in cash value and any death benefits received upon a participant’s passing are tax-free. This means that policyholders do not have to worry about paying taxes on the money earned through the policy, making it an efficient way to grow wealth.
Tax-Deductible Expenses
Expenses related to paying benefits are tax-deductible. This reduces the overall cost of providing benefits, making IUL policies an attractive option for employers looking to offer robust benefit plans to their employees.
Facilitates Financing
IUL policies facilitate the use of financing better than traditional bank loans by allowing debt repayment with death proceeds instead of a traditional amortization schedule. This flexible financing option can be a significant advantage for policyholders looking to manage their financial obligations effectively.
Guaranteed Floor and Cap
These policies typically have a guaranteed floor and cap, often around 0% and 11%, respectively. This ensures that there is a minimum guaranteed return, providing protection against market downturns while capping potential returns to manage risk.
Designed to Create Cash Growth
There are three primary sources of premium payments that contribute to the growth of IUL policies:
Deferrals from Plan Participants
Contributions from the participants’ income deferrals form a substantial part of the premium payments. Participants can allocate a portion of their income to the IUL policy, building cash value over time.
Reinvestment of Death Proceeds
Using the death benefits to further invest in the policy allows for continued growth of the policy’s cash value, ensuring that the investment keeps compounding.
Borrowing Premium Financed Loans
Taking loans to pay the premiums, which are repaid with the policy’s death proceeds, allows for a flexible and efficient way to manage premium payments. This method leverages available capital to maximize the policy’s growth potential.
The level of premium payments from these sources may vary due to group size, age, compensation ranges, and gender.
Investment Strength of IUL Policies
To help understand the strength of IUL investments, let’s refer to specific examples.
Historical Investment Rates
For instance, considering the Symetra Accumulator Ascent IUL 2.0 policy, the historical performance of the S&P 500® Index (this policy’s investment vehicle) shows variable results. However, the policy offers a consistent cap and floor, ensuring some level of predictable growth.
Example Years:
- 2003: S&P 500® Index Change: 26.12%, Resulting Performance: 11.50%
- 2009: S&P 500® Index Change: 23.45%, Resulting Performance: 11.50%
Even when the market faced downturns, such as in 2008 with a -38.49% change in the S&P 500®, the resulting performance for the IUL policy was protected with a 0.00% floor. This protection ensures that the policyholder’s investment never faces a loss, only potential gains up to the cap rate.
Over a 20-year average, the illustrated rate is around 7.58%, providing a robust return on investment compared to other options.
Comparison with Alternative Investments
When compared to a tax-free municipal bond earning 2.85%, IUL policies offer higher average returns over time. As illustrated:
- The crediting rate of an IUL policy can be around 7.42%, significantly higher than the 2.85% return from municipal bonds.
- This comparison highlights the strength of IUL policies in terms of higher potential returns while still offering tax advantages.
Case Study: A Hypothetical Participant
Consider a hypothetical 45-year-old individual making $200,000 annually and deferring 10% of their income. The projected benefit amount grows over time, showing how the participant can accrue significant benefits through the IUL policy.
Example Schedule:
- The deferral contributions build the cash value.
- Reinvestment of death proceeds continues to grow the policy.
- Premium financed loans help manage premium payments effectively.
This structured approach ensures that the participant’s investment continues to grow, offering significant benefits upon reaching the benefit age.
Contact NQP Consulting Today
With the dual benefits of growth and protection, IUL insurance policies offer a compelling option for those looking to make a smart, long-term investment. Their tax advantages, financing facilitation, and designed cash growth mechanisms make them an attractive choice for meeting current and future financial obligations.
By considering this structure and historical performance, individuals can make informed decisions to maximize their financial security and investment returns. The combination of a guaranteed floor, cap rates, tax-free growth, and efficient premium payment methods makes IUL insurance policies a strong and reliable investment choice.
Embracing IUL policies means securing a financially stable future while offering robust benefits to participants, making them an excellent choice for both individual investors and employers looking to provide solid benefit plans. Connect with NQP Consulting today to learn more.