Whether you use your indexed universal life (IUL) policy's cash value to make a down payment on a house or help supplement your retirement income, it can help you when you need it most. In this episode of Money Script Monday, Sean goes over the five ways to access your policy's cash value when you want, for what you want.
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Video transcription
Hello and welcome to another edition of "Money Script Monday." My name is Sean Brady. And today, we're going to be discussing the five ways to access your cash value in an IUL policy.
When you receive your cash from an IUL policy, you can receive that income tax free through policy loans or withdrawals.
And the money you receive from your IUL can be used for purposes such as a college funding strategy, business planning, financial emergency, medical bills, weddings, cars. Just about any situation that arises, you can use your IUL cash value for.
Also, when you've reached those retirement years, you could supplement your retirement income through an IUL policy.
These are the five ways you can access your policy's cash value within an IUL and it's important to note that the specifics of these are going to vary from company to company, product to product, so on and so forth.
But generally speaking, you typically have three types:
- Policy Loans
- Withdrawals/Partial Surrenders
- Full Surrender
Let's talk about the first three first, the policy loans.
With the policy loan, it's an amount that you borrow against your policy using your policy as collateral.
Policy loans are subject to loan interest which will increase the outstanding loan amounts if it goes unpaid.
Now, any unpaid amount is just going to be deducted from your death benefit when the policy or the insured passes away. And policy loans could be repaid at any time and they're not taxable as long as the policy remains in force and it's not a modified endowment contract, or MEC for short.
If it is a MEC, then distributions from that policy would come out gain out first and taxes ordinary income.
Additionally, if it's a MEC and you take distributions prior to age 59 and a half, then there would be an additional 10% Federal tax.
Now that you know a little bit more about policy loans, let's jump into the first two first here: standard and preferred loans.
#1: Standard Loans
With standard loans, these can be typically taken out any time within the first 10 years for a, let's say, net 1% cost.
As an example, 3% would be charged in advance and then 2% would be credited back each year that the loan is outstanding.
#2: Preferred Loans
With preferred loans, you could typically take these types of loans any time after the first 10 years for a net 0% cost.
And as an example, 2% would be charged in advance and then 2% would be credited back at the end of each year.
#3: Indexed Loans
The third policy loan, index loans, these are unique.
With the index loan, annual loan rate is taken out in advance and the amount borrowed can continue to receive index interest credited annually.
That means you could still be receiving or have the opportunity to earn index credits while you're still borrowing from the policy.
It's important to note that with index loans, it contains more risks than standard and preferred loans because there is no guarantee that your policy is going to earn enough interest to offset that loan charge.
It's also important to note that, with policy loans, it's going to reduce the cash value and death benefits and it could become taxable if the policy is surrendered or if it lapses.
Policy loans aren't the only way you can access cash value within your IUL policy. You also have withdrawals and partial surrenders.
#4: Withdrawals/Partial Surrenders
With withdrawals, it's going to reduce the policy's cash value, accumulation value, death benefit, and it may be subject to a charge.
Withdrawals can eliminate, or does eliminate, the possibility of loan interest accruing against your policy's cash value, but the amount of any partial withdrawal or partial surrender that exceeds the premiums paid is subject to ordinary and income tax.
And this could also affect the death benefits guarantee.
#5: Full Surrenders
With full surrenders, the final way to access your money, this has the same potential taxation rules that apply with withdrawals and surrenders.
And if you surrender your policy within a surrender period, then full surrender charges will reduce the amount of cash that will be paid out to you.
I understand that there are many different ways you can choose a distribution within your IUL policy and it's really important to understand the impact of your decision.
That's why I urge you to contact your financial professional so that they can help you make the decision more wisely and help you select a distribution that fits your unique situation.
That concludes today's presentation. Thank you for attending. We'll see you again next time on Money Script Monday.