Alternatives to Owning Indexed Universal Life (IUL) Insurance

Insurers and policyowners can configure an IUL policy’s premium payments and death benefits to resemble virtually any type of life insurance policy, from annually-renewable term to single premium whole life. Consequently, any other type of policy that meets a policyowner’s needs is a suitable, and perhaps preferable alternative if the policyowner does not need the IUL’s flexibility or equity indexing feature. However, a number of other types of policies or strategies offer some of the features of UL and not others, if policyowners desire only certain features.

  1. Current-Assumption Whole Life (CAWL) – ­Sometimes called interest-sensitive whole life, CAWL is essentially IUL without the adjustability features or equity-indexed interest crediting rate. However, similar to IUL’s equity-indexed interest crediting formula, CAWL uses current interest rates in determining additions to cash values. However, similar to traditional ordinary whole life and in contrast with IUL, CAWL generally offers the policyowner little flexibility with respect to changing premium payments or death benefits.
  2. Adjustable Life (AL) – AL combines elements of traditional, fixed-premium ordinary life insurance and the ability–within limits–to alter the policy plan, premium payments, and the face amount. Essentially, one can view AL as IUL without the current assumption and equity-indexed interest crediting features.
  3. Variable Life (VL) and Variable Universal Life (VUL) – If VL and VUL policyowners select a portfolio of investments within their policies that are similar to the equity index used in an IUL equity-indexed interest crediting formula, they can expect investment performance and cash value accumulations to be at least as great as, and generally greater than, that for the IUL policy when equity markets are up. However, because IUL policies have guaranteed minimum interest crediting rates while typically VL and VUL policies do not, in down markets the IUL generally will outperform the VL and VUL. Over the long-term VL and VUL should outperform IUL, but one has no assurance of that, which is part of what makes IUL an attractive insurance alternative to many people.
  4. Flexible Premium Deferred Index Annuity (FPDIA) combined with term insurance – FPDIA is the annuity analog of IUL. It is a pseudo-hybrid of a flexible-premium deferred annuity and a flexible-premium deferred variable annuity (FPDVA). A combination of a FPDIA with level term can generate cash value accumulations and death benefit levels similar to IUL under option B or C. A FPDIA combined with a decreasing-term policy is similar to IUL under option A. The FPDIA, however, has less favorable tax treatment for withdrawals and loans than an IUL policy.
  5. Section 1035 exchanges – The exchange provisions under Internal Revenue Code section 1035 allow certain types of exchanges from one policy type to another without adverse tax consequences. Clearly, these exchange provisions provide nowhere near the flexibility or convenience that an IUL policy does to change premium levels or death benefits. However, the existence of these exchange provisions means that other types of policies are not quite as inflexible as they might otherwise seem.
Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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