Indexed Universal Life Insurance: Business Benefits Explained

If you are a longtime business owner, you are likely worried about how to safeguard the company you've worked so hard to establish. How do you make sure the business continues to thrive when you retire or is protected financially should it fall into hard times? A unique solution you may not have considered is an indexed universal life insurance policy (IUL), a type of permanent life insurance that's linked to a stock market index.

If something happens to you, the insurance provides money that can help keep your business running or support your family. The policy can also grow cash over time, which you can use for loans or reinvest in your business.

Despite these advantages, indexed universal life insurance isn't right for everyone. Before deciding if an indexed universal life insurance policy is right for you, consider your individual circumstances and compare the advantages and disadvantages to other life insurance options.

What is indexed universal life insurance?

Unlike term life insurance, which expires after a set period, an IUL is permanent and lasts as long as you pay the premiums. IULs are much like whole and universal life (UL) insurance policies. Yet, there are differences that make indexed universal life insurance uniquely different from all other life insurance policies.

Here are the key features:

• IULs provide a payout to your beneficiaries and build cash value over time, similar to whole life insurance. However, IULs are unique because they are tied to stock indexes like Nasdaq and S&P 500.
• Positive market performance can increase your policy's value, while a floor rate offers protection against losses.
• You can change your payments to fit your financial situation.
• IULs offer the potential for tax-free loans. Unlike some other types of life insurance policies, the policies also offer additional tax advantages.

What makes IULs different?

You can earn or lose money in the stock market, regardless of the type of investment. One significant advantage of an IUL is that you get some protection from market losses because it contains a floor rate. The floor rate is the lowest interest rate your cash value can earn, often set at 0%.

Another feature is that the premiums are flexible, similar to a universal life policy. You can adjust your payments up or down to suit your financial needs and goals.

7 advantages of IULs for small business owners

Small businesses fail at a rate of 21.9% in the first year, and businesses in existence for 10 years have a failure rate of 65.7%.¹ As a business owner, these statistics underscore the importance of planning for your business's long-term financial health.

Indexed universal life insurance provides many advantages that may directly help business owners. Here are seven of those advantages:

1. Tax benefits: Cash value grows without immediate taxes.
2. Reduced market risk: Your investment won't fall below a certain level.
3. Access to funds: You can borrow against the policy for business needs.
4. Business continuity: The policy helps to ensure your business can continue after your death.
5. Income replacement: Provides income for your dependents.
6. Flexible payments: They can be adjusted based on your needs.
7. Retirement income: You can supplement your retirement income tax-free.

Despite these benefits, there are drawbacks with IUL policies you should also consider. Here are five:

1. Limits on earnings: There’s a cap on how much you can earn with an IUL.
2. No guaranteed returns: Returns aren’t assured, meaning the policy’s performance can vary.
3. Higher costs: Fees are often higher compared to other insurance types.
4. Ongoing management needed: Regular attention is required to manage the policy effectively.
5. Lapse risk: If the cash value falls short of covering costs, the policy could lapse.

High fees are a notable downside, so it's important to review fees and index choices carefully to align with your business goals.

This table breaks down the pros and cons of indexed universal life insurance.

Indexed universal life insurance calculator

The cost of indexed universal life insurance depends on age, gender, health, and coverage amount. While they often cost more than term policies because of their higher growth potential, they are also typically less expensive than whole life policies.

After determining that an indexed universal life policy works for your business, you'll need to decide how much coverage to buy. This is where a life insurance calculator comes in. It can take the stress out of getting the right amount of insurance.

The online calculator gives you a ballpark figure to work with, but it may not reflect the full scope of your business’ need for financial security. For that, you may need a financial professional to evaluate your situation and help you determine how best to cover all aspects of your business, especially if you are looking to retire.

According to the National Association of Women Business Owners, it’s beneficial to plan your exit strategy at least three to five years before you retire.²

Indexed universal life: help protect what's important

You can't predict what the future will hold for your business, but an IUL can help you plan for the unknown. If the worse happens to you, it can help to support your business with a death benefit payout. Knowing your business and family can continue prospering regardless of shifts in the economy or life events should help give you some peace of mind.

Another thing to keep in mind: Getting the right amount of life insurance is just as important as choosing the best policy for your needs. Calculate your need with Mutual of Omaha's simple online tool to be certain you have enough coverage.

For more information about how an indexed universal life insurance policy can protect your business, fill out this form and a financial professional will reach out to you.