Indexed universal life (IUL) insurance

If you've seen a video calling indexed universal life a tax-free retirement machine, slow down a little. It can be a useful policy for the right person. It's also complicated, so here's the straight version, followed by two other kinds of life coverage worth knowing about.

How does indexed universal life (IUL) work?

IUL is permanent life insurance with a cash value account. Part of what you pay covers the cost of insurance and policy fees, and the rest goes into cash value. That cash value earns interest based partly on how a market index, such as the S&P 500, performs.

Your money isn't invested in the market directly. The insurer credits interest using a formula with a cap, which limits how much you can earn in a good year, and a floor, often 0%, which keeps a bad year from wiping out what you've already been credited. Fees and the cost of insurance still come out every month, so a flat year can mean the cash value goes down a little.

You may be able to borrow or withdraw from the cash value for big expenses or retirement income while the coverage stays in place. Policy loans are generally not taxable while the policy stays in force, but loans and withdrawals reduce the cash value and the death benefit. If the policy lapses with a loan on it, you can owe taxes. Talk with a tax professional before you count on it for retirement.

My take: IUL works best for people who can fund it well for many years and want permanent coverage anyway. If you mainly want affordable protection while your kids are young, term life insurance will usually do that job for much less.

Mortgage protection life insurance

This is life insurance sized to your mortgage. If you die, the death benefit goes to your family, and they can use it to pay off the loan or keep making payments so they don't have to sell the house. Because the money goes to your beneficiaries rather than the lender, they decide what to do with it.

It's often a term policy with a length that matches the years left on your loan. If you're also reviewing coverage on the house itself, my homeowners insurance guide covers that side.

Family and child life insurance

You can buy coverage for your kids while they're young and healthy, when it costs the least. Some policies include an option to buy more coverage later without a new medical exam, which matters if a health problem shows up down the road. Coverage for children is small and inexpensive, and I'd never put it ahead of making sure the parents are insured first.

Want to talk it through? Call me at (951) 383-3000. I'm Javier Calvo, a Farmers agent in Murrieta, and I'll explain any illustration line by line, in English or Spanish, before you sign anything.