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Indexed universal life (IUL) insurance offers a unique blend of life insurance protection and the potential for cash value growth linked to market indexes. One of the primary tax advantages of IUL policies is that the cash value growth is typically tax-deferred, meaning you won’t pay taxes on the gains as they accumulate within the […]

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","

A financial advisor can help you determine what role life insurance could play in your finances and retirement.

","

Benefits of Indexed Universal Life (IUL) Policies

","

IUL insurance offers a blend of life insurance protection and earnings potential, making it an attractive option for individuals seeking financial security and growth. Here are eight general benefits to consider.

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Tax-Deferred Growth

","

The cash value within an IUL grows tax-deferred, allowing for a more efficient accumulation of funds. This means you won’t pay taxes on the gains as they grow with compound interest over time in the policy.

","

Tax-Free Death Benefit

","

Beneficiaries receive the policy’s death benefit without having to pay income taxes on it. So your loved ones can get the full financial protection that you intended.

","

Flexibility in Premium Payments

","

IULs offer flexible premium payment options, which allow policyholders to adjust their contributions based on their financial situation. This flexibility makes it easier to maintain the policy during different life stages and financial circumstances.

","

Potential for Cash Value Growth

","

The rate of return on an IUL policy is typically linked to the performance of a stock market index like the S&P 500, but it’s credited as interest. This means that returns are not directly invested in the stock market and the interest credited to the policy’s cash value is based on the movement of the selected index. The insurance company usually sets caps and floors.

","

Access to Cash Value

","

Policyholders can access the cash value of their IUL through tax-free loans or withdrawals, providing a source of funds for emergencies, education expenses, or other financial needs. This access to cash value adds a layer of financial flexibility and security.

","

Downside Protection

","

While IULs offer the potential for market-linked growth, they also include downside protection. This means that even if the linked index performs poorly, the policy will usually still credit a minimum guaranteed interest rate, protecting your cash value from market losses.

","

Customizable Coverage

","

IUL policies can be customized to meet individual needs and preferences. Riders such as long-term care, chronic illness and disability can be added to enhance the policy’s benefits and provide additional protection.

","

1035 Exchange Option

","

A 1035 exchange allows policyholders to transfer the cash value from one life insurance policy to another without incurring immediate tax liability. This provision can be beneficial if the policyholder wants to switch to a different type of life insurance policy or another IUL with better terms. The 1035 exchange must meet specific IRS requirements to qualify for tax deferral.

","

How Indexed Universal Life (IUL) Policies Are Taxed

","

","

IUL policies can offer many tax advantages. But they also carry tax consequences, and therefore, you should understand how to report them correctly on your taxes to avoid issues with the IRS. Here are five things to keep in mind.

","

Paying Taxes on Tax-Deferred Gains

","

IULs accumulate cash value on a tax-deferred basis, meaning you don’t pay taxes on the growth each year. However, you must report any taxable events related to the policy, such as withdrawals or policy surrenders that result in taxable gains.

","

Reporting Withdrawals and Loans

","

Policyholders can access the cash value of their IUL through withdrawals or loans. Withdrawals from the policy’s cash value are tax-free up to the amount of premiums paid into the policy. This is because these withdrawals are considered a return of the policyholder’s basis. However, any withdrawals that exceed the total premiums paid are subject to income taxes.

","

Loans taken against the policy’s cash value are generally tax-free, provided the policy remains in force. These loans do not count as taxable income because they are considered a debt against the policy’s cash value. It’s important to note that if the policy lapses or is surrendered with an outstanding loan, the loan amount may become taxable.

","

Both of these taxable events should be reported on your annual tax return.

","

Policy Surrenders and Lapses

","

If a policyholder decides to surrender their IUL policy, any gains in the cash value above the premiums paid are subject to income taxes. This means that the difference between the cash surrender value and the total premiums paid will be taxed as ordinary income. Additionally, if the policy lapses, any outstanding loan amount that exceeds the premiums paid will also be considered taxable income. These amounts should be reported on Form 1040.

","

Tax-Free Death Benefits

","

The death benefit provided by an IUL policy is generally tax-free to the beneficiaries. This is a considerable advantage, as it ensures that the full amount of the death benefit can be used by the beneficiaries without the burden of income taxes. This also makes IUL policies an effective tool for estate planning, as the beneficiaries receive the full amount without tax liability.

","

1099-R Form

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Insurance companies issue Form 1099-R for distributions from an IUL policy that are taxable. This form provides details on the total distribution amount and the taxable portion, which you must report on your tax return.

","

Bottom Line

","

","

The tax-deferred growth of an IUL can help you build wealth and offer tax-free death benefits to your beneficiaries. Understanding the tax implications of withdrawals, loans and policy surrenders can help you maximize your policy coverage and potential for growth. Given the complexities involved in reporting IULs, it is advisable to consult with a tax professional or financial advisor. They can provide personalized advice based on your specific situation and ensure that you correctly report any taxable events related to your IUL policy.

","

Financial Planning Tips

","$48","

Photo credit: ©iStock.com/zamrznutitonovi, ©iStock.com/Jacob Wackerhausen, ©iStock.com/fizkes

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Equity-indexed life insurance is a type of permanent life insurance policy that combines elements of traditional life insurance with investment opportunities. While more expensive than simple term insurance, it allows policyholders to build cash value in a separate account. With an equity-indexed life, the cash value can grow tax-free by earning a return that tracks a stock market. Policyholders can tap the cash value with loans and withdrawals. Sit down with a financial advisor to decide how life insurance can be used in your financial plan.

","

Equity-Indexed Life Basics

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Like other types of life insurance coverage, an equity-indexed life policy provides a death benefit to beneficiaries upon the insured’s death. In exchange for this benefit, the policyholder pays a premium to the insurance company. Unlike term insurance, the premium for an equity-indexed life policy is more than the cost of providing the death benefit. A portion of this excess is deposited into a cash value account.

","

The value of the cash account can increase over time. With an equity-indexed life policy, the insurance company ties the cash value to a stock market index such as the S&P 500.

","

Other types of insurance, such as traditional whole life and universal life, also can be used to build cash value. However, with these types cash value generally grows at a fixed rate. Because its growth rate is tied to a stock market index, the equity-indexed life policy offers the opportunity to get more growth than other cash value policies.

","

How Equity-Indexed Life Insurance Works

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Applying for an equity-indexed life policy resembles applying for any life insurance. It may involve a medical exam to establish that you are eligible for life insurance.

","

Once approved, you’ll make premium payments, often monthly, to keep the policy active. After your death, the beneficiaries you named receive a lump sum. Insurance death benefits are generally tax-free and also avoid probate, making insurance a useful tool in estate planning.

","

As you pay the premiums, a portion of the amount in excess of the cost to provide the death benefit gets deposited in the cash value account. This cash value can grow based on the performance of the chosen equity index.

","

Any growth in the cash value account is free of income taxes. And you’ll generally be protected against losing money even in a market downturn by a guaranteed minimum interest rate. If the market does well, on the other hand, the policy terms may limit your gains with a cap.

","

The policyholder can withdraw or borrow against the cash value, once the contributions from the premiums and any earnings accumulate to a certain amount. Loans and withdrawals may, however, reduce the death benefit.

","

Equity-Indexed Life Insurance Pros and Cons

","

Equity-indexed life insurance offers some specific advantages compared to many other approaches to insurance and investment. However, it also has some notable downsides.

","

Pros of equity-indexed life include the potential for higher returns compared to other types of insurance such as traditional whole life, which generally has a set interest rate. In addition to the possibility of better earnings, equity-indexed life policies also have a safety net in the guaranteed minimum interest rate.

","

In addition, equity-indexed life has some significant tax advantages. The death benefit from the insurance as well as the earnings on the cash value account are both generally tax-free. And having the ability to tap the accumulated cash value for loans and withdrawals offers policyholders useful flexibility.

","

Cons of equity-indexed life insurance include the cap that most policies place on how much you can earn. And, while there is a guaranteed minimum return, it may be less than you could earn with another investment. Equity-indexed life is also more expensive as a rule than term life insurance. That is because part of the premium goes to fund the cash value account and also because of added fees.

","

Bottom Line

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Equity-indexed life insurance is a complicated financial product that combines features of life insurance and investments. Using it effectively requires a good understanding of both insurance and investment principles. While it’s more costly than term insurance, the higher premiums go to fund a cash-value account that can grow. The growth rate for this account is set by tracking a stock market index, but it may not perfectly track market returns. The cash value account may be protected by a floor limiting how low the rate of return can go, which can be helpful in a down market. However, it may also have a cap limiting the upside.

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Tips on Insurance

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A financial advisor can help you make informed decisions about insurance, investing and other aspects of your personal financial life. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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Use SmartAsset’s Life Insurance Quotes tool to find what you’ll pay for the coverage you need.

","

Photo credit: ©iStock.com/Drazen Zigic, ©iStock.com/NickyLloyd, ©iStock.com/shapecharge

"],"experts":null,"link":"/life-insurance-policies/equity-indexed-life-insurance","published":{"datetime":"2023-9-14","readable":"September 14, 2023"},"shareInfo":{"title":"Equity-Indexed Life Insurance","origin":"/insurance/equity-indexed-life-insurance"},"isNewsArticle":false},{"id":"cG9zdDoyMzUzMzM=","databaseId":235333,"postId":235333,"author":{"node":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":{"url":"https://secure.gravatar.com/avatar/04483497dbd73f712b504e401c9c7d22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. His freelance \r\nbyline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":{"pageInfo":{"offsetPagination":{"total":776,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mhenricks","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTU0NA==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19544,"categoryId":19544,"link":"https://smartasset.com/health-insurance/articles","name":"Health Insurance","postCount":{"pageInfo":{"offsetPagination":{"total":34,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"health-insurance","ancestors":{"nodes":[{"name":"Insurance","slug":"insurance","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Insurance","id":"dGVybTo5MQ==","slug":"insurance","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$60","date":"2024-03-05T15:09:17","excerpt":"

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If you’re self-employed, you can deduct the premiums that you pay for health insurance, saving money at tax time and helping to offset the cost of health coverage. The self-employed health insurance deduction is an above-the-line deduction, so you don’t have to itemize deductions to take it. It’s not available in all situations, however. Key factors for eligibility include having qualifying health insurance, being considered self-employed and not having access to an employer group health plan. You can, however, deduct premiums for several kinds of health insurance, including medical, dental, Medicare and long-term care. Consult a financial advisor to identify all deductions you may be eligible to take as a self-employed individual.

","

Self-Employed Health Insurance Premium Deductions

","

The self-employed health insurance deduction allows self-employed taxpayers to deduct premiums paid for health insurance for themselves and family members. It is an above-the-line deduction, so it can be taken whether or not you itemize deductions. This deduction reduces your taxable income, which may make you eligible for other tax benefits that have income thresholds.

","

While many self-employed people will be able to take this deduction, there are some restrictions. For one thing, the insurance coverage has to meet some criteria. Additional limitations keep it from being used if the self-employed person could get insurance through an employer.

","

Qualifying Insurance Criteria

","

Most types of health insurance qualify for the self-employed health insurance deduction. Eligible premiums include those for medical and dental coverage and all kinds of Medicare, including Parts B, C and D. Premiums for long-term care plans also may be deducted as long as the policy is deemed tax-qualified by the IRS.

","

This deduction is not just for premiums you pay to cover your own health. You can also deduct premiums covering yourself, your spouse, dependents and non-dependent children under age 27.

","

Self-Employment Eligibility

","

There are also some rules to follow concerning your own eligibility for this deduction. To qualify for deducting health insurance premiums, you must have reported net profit income as a sole proprietor on Schedule C or as a farmer on Schedule F. Also eligible are general partners, limited partners receiving guaranteed payments and S corporation shareholders who own more than 2% of the S corp and get W-2 wages.

","

It’s not all-or-nothing when it comes to deciding your eligibility for this deduction in a particular year. Eligibility is determined monthly. For example, if you were self-employed for January to June and then had an employer-sponsored plan from July to December, you could deduct your premiums for the first six months.

","

Self-Employed Health Insurance Premium Limitations

","

One of the most significant obstacles to claiming this deduction is that you can’t have had access to employer-sponsored health coverage. That includes you and your spouse. If either of you could have joined a plan at work, you cannot claim this deduction. However, again it’s not all or nothing. If you only had access to employer-subsidized coverage part of the year, you could claim the deduction for the rest of the year. Also, there may be exceptions if the company-sponsored plan was too costly or didn’t meet minimum coverage standards.

","

When it comes to long-term care, some age-based limits apply. The IRS caps the maximum amount of qualified long-term care premiums you can deduct based on how old you are. Caps increase with age and adjust annually. For 2023, ages and amounts are:

","

Age	Cap
40 and under	$480
41 to 50	$890
51 to 60	$1,790
61 to 70	$4,770
Over 70	$5,960

","

Caps for 2024, according to the American Association for Long-Term Care Insurance, are:

","

Age	Cap
40 and under	$470
41 to 50	$880
51 to 60	$1,760
61 to 70	$4,710
Over 70	$5,880

","

How to Claim

","

You claim the self-employed health insurance deduction on Schedule 1 of Form 1040. Note that this is different from claiming medical expenses, which you do when you itemize deductions using Schedule A.

","

The self-employed health insurance deduction can be claimed even when you don’t itemize. This makes it useful to more people, since most taxpayers use the standard deduction rather than itemizing. An above-the-line deduction like this also reduces your adjusted gross income, so you may be able to tap into more tax credits. If you do itemize, you can still claim this as an above-the-line deduction.

","

Bottom Line

","

","

The self-employed health insurance deduction offers a valuable tax break to help offset expensive yet essential coverage costs. To qualify, you must have eligible insurance and meet self-employment criteria. If you do, you can claim this deduction regardless of whether you itemize.

","

Tax Planning Tips

","$77","

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You can apply to receive Social Security Disability Insurance (SSDI) benefits if you have worked and paid Social Security taxes, are at least age 18 and haven’t reached full retirement age, which depending on your birth year is 66 or 67. Once you reach full retirement age, you can’t apply for or receive SSDI payments. You can instead apply for Social Security retirement benefits. If you’re already getting SSDI payments and reach full retirement age, you’ll keep getting benefits but they will be retirement benefits instead of disability benefits.

","

A financial advisor can help you create a retirement plan for your specific goals and needs.

","

Social Security Disability Age Requirements

","

Workers who have become disabled can receive payments from Social Security Disability Insurance (SSDI). This is a federal program, part of the Social Security Administration, that provides financial benefits for people who have worked and paid Social Security taxes on their wages but are no longer able to work due to illness or injury. Dependents of disabled workers may also be able to get benefits.

","

In order to receive benefits, workers must have worked and paid Social Security taxes on their earnings, also be determined to be unable to continue working due to a medical condition. The average benefit as of January 2024, according to the Social Security Administration, was $1,711.40.

","

SSDI also has age restrictions. To receive the benefits, you must be at least age 18 and no older than your full retirement age. Full retirement age is between 66 and 67, depending on the year you were born.

","

You can still apply for and get SSDI benefits as long as you have not reached full retirement age. If you are of full retirement age, you can apply for and receive retirement benefits.

","

The retirement benefits will be the same monthly dollar amount as the SSDI benefit. There’s one difference, however. If you’re getting retirement benefits, and your health improves and you are no longer disabled and unable to work, your benefits won’t stop. To receive SSDI, you have to be unable to work.

","

Other Requirements and Exceptions

","

In addition to the age requirement, you must have a work history to receive SSDI. The number of years that you need to have worked varies according to your age, with younger applications typically needing fewer years to meet the criteria.

","

You also must have been injured or developed a medical condition that makes you unable to work. The condition must be expected to last at least 12 months or to end in your death.

","

You’ll have to convince a Social Security examiner that you can’t do the kind of work you have been doing in the past as well as adapting to do a different sort of work. SSDI is for people who are permanently and fully disabled. It doesn’t pay for temporary or partial disabilities.

","

The Social Security Administration maintains a list of medical conditions that typically qualify applicants to be approved to receive disability payments. Having one of these doesn’t necessarily guarantee your application will be approved, or that you won’t be approved if you are suffering from something else. The qualifying process can be lengthy and involved and the outcome isn’t always predictable.

","

If you don’t qualify for SSDI, you may still qualify to receive payments under another Social Security program, Supplemental Security Income (SSI). In fact, if you are 65 and have limited financial means, including low income and few assets, you may be able to qualify automatically for SSI (Supplemental Security Income) without having to prove that you’re disabled.

","

Bottom Line

","

","

You can apply for and receive SSDI payments from the time you turn 18 until you have reached full retirement age of 66 of 67 years old, as long as you have become unable to work due to illness or injury. After that, you can’t receive SSDI any longer, but you can still qualify for Social Security retirement payments based on age rather than ability to work. To receive retirement or disability benefits from either of these programs, you must have a work history and paid Social Security taxes on earnings.

","

Tips for Retirement Planning

","$8a","

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