When you have a conversation about the tools investors commonly use to build wealth, a wide array of assets — such as stocks, bonds, real estate, mutual funds, and more — are often the most common vehicles mentioned. However, there is another instrument that has been used by high-net-worth families that is often little understood by mainstream investors. Indexed universal life (IUL) insurance is often viewed solely as a life insurance product, but in fact, many investors use it for applications beyond that in a fascinating way. When structured properly, IUL policies can serve as a dynamic wealth-building tool that combines the security of life insurance with tax-advantaged growth and flexible access to capital.
They are particularly popular among business owners and families seeking to protect their wealth.
What Does Life Insurance Have to Do With Wealth Building?
When you purchase an IUL policy, which is similar to other types of whole life insurance policies, there is a cash value that is deposited into the policy and grows over time. Indexed universal life insurance, in particular, has the ability to link cash value growth to market indices like the S&P 500.
At the same time, the cash value is guaranteed against loss when the broader stock market goes down. That’s because IUL policies include “caps” and “floors,” which moderate the fluctuations in interest rates that your account can experience. An account’s floor, which is frequently fixed at 0%, is the lowest rate you can earn and is generally set for the policy’s life. This means that as a policyholder, you can participate in market gains without risking losing principal during downturns.
The cash value grows as a tax-deferred asset, and you can access it through policy loans for major purchases, business investments, college tuition, or retirement income. All the while, the underlying cash value of your IUL will continue to grow.
“Cash value within properly structured indexed universal life insurance policies offers significant asset protection benefits that many other financial vehicles don’t provide,” says Rob Graham, CEO of Wealth Express.
High-Liability Occupations
For business owners and professionals in high-liability occupations such as medicine, law, and construction, IULs can form part of a comprehensive asset-protection strategy alongside other legal structures like trusts or limited liability companies (LLCs). This asset protection is a key draw.
“In many states, life insurance cash values are either completely or substantially protected from creditors through specific statutory exemptions,” says Graham. “For example, Florida and Texas offer unlimited protection for life insurance cash values, while other states may protect a specific dollar amount or percentage.”
Say, for example, that you’re a doctor or lawyer who loses a malpractice suit. In such a scenario, the plaintiff could lay claim to a variety of your financial assets, such as bank accounts, real estate, and stocks and bonds. Even personal property like jewelry, cars, boats, electronics, and artwork could be at risk. Maximizing the cash value of a well-structured indexed universal life policy allows you to protect your assets and better ensure your family’s financial security.
The privacy of indexed universal life insurance policies can further shield you against taxable events and public reporting. You can also use IUL policies to protect yourself from potential litigation. Because your IUL’s cash value is off limits to creditors due to state-level statutory exemptions, you become a less tempting courtroom target.
Cash Flow Banking: How The Wealthy Create a Personal Bank for Their Family
Cash flow banking (also known as “infinite banking”) is a popular strategy within the indexed universal life insurance space to not just create wealth, but to pass it on to future generations of a family.
By max-funding an IUL and minimizing the death benefit to increase your cash value, policyholders create a liquid tax-advantaged pool of capital. You can borrow against this cash flow at low rates while earning higher returns on the full fund balance. This process is a lot like using the insurance company’s money.
How does this work? Say your policy has a cash value of $150,000. You can borrow $75,000 of that tax-free to buy a car, pay a child’s tuition, or put a down payment on a vacation home, yet your policy will continue to yield a return on the full $150,000. In essence, you can use the same money for two purposes at the same time.
Repayment Terms
Unlike traditional banking, policyholders control the terms of the loan without credit checks or collateral requirements. Repayment terms are equally fluid; you can pay off your loan in a single lump sum or in installments. You may even be able to defer repayment altogether (although this will result in a diminished death benefit for your beneficiaries). This flexibility makes IUL policies ideal for financing vehicles, real estate, or business opportunities.
“When implementing the personal banking method with a properly structured IUL, policyholders often pursue several strategic financial goals that traditional banking relationships simply can’t facilitate,” Graham says.
For example, one client used their policy to rapidly secure inventory when a competitor was liquidating their assets. Their IUL’s cash value provided a source of ready money in the form of a reduced-interest, tax-free loan. They were able to double their investment within a few months. When you need cash fast, a properly structured indexed universal life insurance policy can offer superior flexibility.
Clearly, the strategic advantages of an IUL are compelling. They include market upside courtesy of the policy’s linkage to market indices, which allows for greater cash value growth. On the flip side, there’s downside protection, thanks to the IUL’s floor, which precludes a negative return. Its tax-advantaged nature means lower internal costs, all while enabling flexible death benefit adjustments.
Building Capital for Long-Term Goals
You build cash value in an IUL through the payment of premiums, which are divided three ways. The first part is apportioned to the policy’s death benefit — it is insurance, after all. The second goes toward the insurance company’s operating expenses and the amount it retains as profit. The third portion — and most important for the stated goal of wealth creation — is what becomes the policy’s cash value. As noted above, structuring your IUL to maximize the cash value contribution will enable you to amass a pool of liquid capital more quickly.
Because your premiums have to fill these three buckets, expect to spend roughly five to six years building meaningful cash value in your IUL. Most clients reach an optimal efficiency point after about eight years. The earlier you start, the more time you’ll have to tap into the power of compound interest.
For example, a 30-year-old saving $15,000 to $25,000 annually could see substantial growth by age 50, potentially doubling by 60. This long-term approach suits goals like funding education, accumulating retirement income, or facilitating multigenerational wealth transfer.
IULs offer tax efficiency comparable to whole life but with better growth potential due to index-linked returns. The minimal insurance cost acts as a fee for tax benefits, making max-funded IUL policies economically attractive. As a policyholder, you can create tax-free income streams through loans, a critical advantage in an area of potential tax increases.
Real-World Applications
Policyholders of indexed universal life insurance policies use their IULs to meet a wide range of financial goals. For example, you might use your IUL to finance major purchases. You’ll be paying interest back to your policy instead of the bank, creating a mechanism to recapture wealth.
As an entrepreneur, you could use your indexed life insurance to fund an expansion, pay for a technology upgrade, or purchase inventory without traditional lending hurdles. Similarly, parents can use policy loans to cover their children’s education expenses, circumventing the restrictions of 529 plans. If your child has their heart set on attending a university overseas, for example, you won’t encounter taxes or penalties as you may with a 529.
The flexibility of an indexed universal life policy is unmatched. It can adapt to each phase of your life without penalties. A single policy can serve multiple goals over your lifetime.
Consult a Professional Before Making Any Moves
The key to tapping into the benefits of indexed universal life insurance is to choose the right structure. Less experienced advisors may prioritize death benefits, which increase funding costs and reduce the cash value growth of your plan.
Once you’ve ensured that your IUL is properly structured, you’ll need to manage it. Working with specialists who are knowledgeable about indexed universal life insurance policies and your personal financial goals is the best way to unlock the full benefits of IUL policies.
A Versatile Tool for the Future
Indexed universal life insurance policies are a pliable solution that can serve you through every stage of your life. You can use such a policy to accumulate wealth, protect your assets, and unlock key tax advantages. Uniquely, IULs can function as a cash flow banking solution as well.
Whether you’re a business owner, professional, or your family’s financial planner, it’s worth exploring the many potential benefits of IULs. A properly structured indexed universal life insurance plan can transform your financial strategy and offer security in one powerful package.
Featured Image Credit: Photo by Leeloo The First; Pexels; Thanks!
