Expert: Dave Bowman - 9/26/2009

Question
Who should purchase Indexed Universal Life?

Why should someone purchase this product?

When in life is it a good time to purchase this product?

Answer
I would prefer to use the word "would" rather than "should," as the latter implies that someone else is making a decision for you that is simply a matter of choice.

With that, I suggest that Idexed Universal Life is a good vehicle for someone who wants to defer income taxes and perhaps to avoid them altogether. Also, IUL may be a good alternative to traditional whole life insurance.

The primary advantage of IUL over traditional fixed whole life is the ability to credit excess interest based on some outside index such as the S&P 500 or NASDAQ 100.  In theory, this method of crediting excess interest may result in higher interest being credited than with traditional methods of crediting dividends.  Additionally, universal life policies allow partial surrenders of the cash surrender values, then low interest loans (as low as a net zero percent) that allow the policy owner to generate income from the policy without paying income taxes.  At death the loans are paid off from the tax free death benefits.

With that said, there are other ways to generate tax free income. These include municipal bond and bond mutual funds and unit trusts. Also, Roth IRA's and Roth 401(k)'s.  Life insurance has a cost for the life insurance component and this must not be overlooked. Where there is a need for life insurance, I strongly advise using term life insurance to meet the bulk of the need, as most people can't afford the amount of life insurance that they realistically need using permanent life insurance.  Also, I advise against purchasing life insurance where there is no need for it, regardless of the tax advantages of so doing.

Finally, you ask when is the best time to purchase the product.  Waiting to purchase life insurance is never a good idea, as you might die or become un-insurable, and thus not able to purchase the amount of life insurance you need or may have to pay more for it. One strategy is to purchase a term policy at a young age, then convert portions of it into a single IUL policy over time in portions that are affordable for you.  Always make sure that the total amount of life insurance, between the term life and the IUL, is sufficient to meet the needs of your beneficiaries.