A Closer Look at Single-Premium Indexed Universal Life Insurance

People depend on life insurance for many reasons. Some households use it for income protection, as they have children or other dependents for whom they provide. Retired and middle-aged working individuals may use it for legacy or estate planning goals. It could be part of a broader legacy or estate plan, as the tax treatment of life insurance allows for an efficient transfer of wealth to loved ones.

Depending on your goals, life insurance comes in many forms, and one is Single-Premium Indexed Universal Life Insurance. It’s also known as “Single-Premium IUL,” or even just “SPIUL.” Let’s take a closer look at this universal life insurance option and what it might have to offer.

Passing on a Tax-Free Legacy

When searching for a strategy to pass on a death benefit to your heirs tax-free, both whole life policies and IUL policies may make your short list. Depending on your unique needs, such as your age and the length of time you have to defer, you might want to give SPIUL insurance a closer look.

Why? Because some SPIUL policies provide a death benefit, along with a “face” amount of coverage. The “face” amount is a guaranteed death benefit to the age of 120. “Wait, age 120?” you ask. “Will I really live that long?”

In May of 2013, National Geographic’s cover featured a photo of a cute baby (four different covers with four different babies, to be exact) and this headline: “This baby will live to be 120.” Then, on its February 23, 2015 cover, Time Magazine featured another cute baby pic with its own headline: “This baby could live to be 142 years old.”

The point is that with modern-day lifestyle enhancements, technology, and medical advances, people are living longer. Not knowing your exact genetic makeup or your personal longevity profile, if you want your policy to be in force upon death — whenever that may be — a guarantee to age 120 should be considered.

Single Premium Lets You Set It and “Forget It”

Why choose the single-premium feature instead of paying premiums to your policy over time? Here are some advantages to providing a lump-sum start to your policy:

• Less hassle without budgeting for recurring premium payments.
• Mitigating the risk of defaulting on your life insurance because of a missed payment.
• Fewer components of the policy to monitor and manage

These potential advantages are just a few factors to think about. Guidance from a knowledgeable life insurange agent or another financial professional acting in your best interest may help you further.

Indexing is What Differentiates SPIUL

As in indexed universal life insurance, SPIUL allows you to put cash value amounts into a “fixed” component, giving you the opportunity for growth potential linked to a specific index. The cash value grows inside the policy as a result of changes within an index.

The S&P 500 price index is common in many IUL policies. However, there might be other broad index choices, including the Dow Jones Industrial Average or the Nasdaq 100.  

Here’s how the cash value may grow:

• The insurance company credits interest to your policy cash value based on the activity of the correlating index.
• Your premium dollars aren’t invested directly in the market.
• When the index goes up, the cash value may earn interest that is calculated based on a portion of the index’s growth.
• If the index goes down, your cash value doesn’t drop in value.
• An IUL policy comes with a “floor,” or protection against index declines that assures the policy won’t be credited negative interest.
• Many policies come with a floor of 0%, protecting your policy from losing value as a result of index declines.
• If the policy has optional rider fees or you pay a surrender charge for early withdrawals, your policy cash value may decrease in the times of zero or low interest.
• The flip-side of the protection against losses is capped growth potential.
• Indexed universal life insurance may come with certain growth limits, including caps and participation rates.

So, say your policy had a “cap” of 10 percent. If the index shot up 12 percent, the cash value would be credited just up to the cap of 10 percent.

These products may have attractive caps and participation rates. Keep in mind, though — the insurance carrier has the ability to change these rates during your ownership of the policy. That being said, here’s a potential benefit to the client’s beneficiaries.

If the death benefit grows, as it is likely to do, upon death, whichever is greater, the face value or the death benefit, is what will be paid out. Not all life insurance contracts have this benefit, so make sure you confirm what benefit may be available upon deceasement.

Depending on the policy, an accelerated benefit rider may be available. This rider typically provides payouts to cover your terminal illness, as well as chronic and critical illness. Therefore, should you need these benefits, you can have them in place for a worst-case scenario.

Illness Coverage in Case Your Need It

Whatever you don’t use is still passed on tax-free. The benefit amount that you accelerated and used will be deducted from the death benefit. Depending on your age at issue, these benefits can be quite attractive and come in very handy later in life when health issues may arrive.

This accelerated benefit rider is typically triggered by the inability to perform two of the six Activities of Daily Living or ADLs. The basic ADLs are self-care activities everyone must perform to lead a normal, independent life.

Those ADLs may include:

• Eating
• Bathing or hygiene
• Dressing
• Grooming
• Mobility
• Toileting

Qualified Money May Be Used

Using pre-tax dollars to purchase an asset that provides for a tax-free benefit has many potential benefits. That can include making the cost of life insurance protection much more affordable. It’s important to understand the different tax treatments that may apply to life insurance when it is purchased with money from qualified sources of funds, or in other words, with pre-tax dollars.

Moreover, there are strict rules and limitations for life insurance and qualified plans. This makes it essential that you work closely with a financial professional who has all the facts in order to ensure that your SPIUL strategy is a success.

Using this strategy allows you to cover the taxes over a three-year, five-year or 10-year period. You may look at using a three-year or five-year period with qualified money, as the benefits may be more attractive. Consult with a knowledgeable financial professional for personal help and guidance.

Need Help with Exploring Your Insurance Options?

Ready for personal attention as you consider different life insurance options? A financial professional at SafeMoney.com can assist you.

Use our “Find a Financial Professional” section to connect with someone directly. And if you need a personal referral, call us at 877.476.9723.