Here are five great questions I’ve gotten over the last few weeks. What really struck me are most of these are items that usually aren’t the first things that pop up in conversations about the concept but are really important.
1. Does having an IUL or contributing to an IUL affect yearly tax reporting or have any tax implications? One of the great things about an IUL is the cash you access as a policy loan isn’t income so it doesn’t trigger pesky 1099s or other notices to the IRS. Not only is there no tax liability on those loans there isn’t a bunch of reporting either. You are not selling anything. There is no gain or loss. Simply, it isn’t income so you don’t owe any income tax.
2. How does the cash value portion of the IUL affect the asset calculations of the parent’s assets when my children applies for college loans or scholarships? Currently parents are able to exclude cash values in insurance contracts from assets in the formulas on financial aid forms (both the FAFSA and CSS Profile) as well as on many scholarship requirements. Not only is IUL an excellent way to actually save for a college education the way it is treated on your “balance sheet” is favorable as well.
3. Do you have to repay the loans you take? Yes, the loans you take do have to be repaid. The good news though is they do not have to be repaid while you are alive. Upon your death the insurance carrier will deduct your outstanding loan balance from your death benefit and pay the remaining amount to your beneficiaries as you have specified.
4. You showed me taking out $xx,000/per year beginning at age 65, what if I don’t need to take that much out? Don’t take it out. Leave it in the contract and allow it to continue to grow! Alternatively you can select to take less out. Conversely if you need to take money out sooner, you can do that as well, however taking money out earlier will impact the amount you can take out later. One of the great things about the IUL design is the flexibility it offers you. The document containing the projections, called an “illustration” is simply that: a projection. It is a hypothetical scenario. You don’t have to stick to the funding or distribution plan in it (of course changes will impact the values in your contract).
5. What if my health changes or something bad happens to me after I get my IUL? Will my rates go up? No, absolutely not! Indexed Universal Life Insurance is a form of permanent life insurance. You are underwritten at the time you take out the policy. The insurance company can’t raise your rates just because you have a heart attack, get cancer, put on weight, start smoking, etc. in the future. This is another good reason to consider a policy while you are healthy (although you’d be surprised, IUL still works for people that aren’t in great health, ask me or another advisor that specializes in IUL to show you).
Email me your questions. firstname.lastname@example.org I’d love to hear from you!
Of course standard disclaimers apply: this isn’t tax, legal, estate-planning or investment advice and your individual circumstances may vary. Contact a qualified advisor about your situation.