Does Your Indexed Universal Life Policy Have Riders to Protect You From a Tax Consequence?

If you are in the market for or have already purchased an Indexed Universal Life insurance policy, it is important to understand how distributions can leave you exposed to a major tax consequence if the policy lapses while you are alive. Multiple life insurance companies have certain riders built into the contract (are commonly called “Overloan Protections Riders,”) but the problem with these riders is that they are not automatically triggered. The policy owner still has to send a letter or complete a form in order to activate this rider and keep the policy from lapsing. An example could be: a forty-year old person who pays $1,000 per month into a maximum funded, indexed universal insurance plan with a death benefit of $750,000 for twenty five years, putting a total of $300,000 in premiums into the policy. At age sixty-six, the policy has a cash value of $700,000 and the policy owner starts taking distributions utilizing variable loans to the tune of $70,000 per year. After twenty years, the policy owner has taken $1,400,000 of distributions and has a looming tax consequence of $1,100,000 because loans are not taxed unless the policy lapses. If at age eighty-six, the policy lapses, this policy owner would be responsible for paying ordinary income tax on $1,100,000 ($1,400,000 minus $300,000 of basis, already non-deducible premiums paid into the policy). If the policy owner has an “Overloan Protection Rider” and meets the requirements to trigger the rider, it could save them from a major tax consequence.

Protected Death Benefit Provision

There is currently one life insurance company selling indexed universal life offering a built-in rider called the “Protected Death Benefit Provision”. This rider allows for the policy owner to proactively guarantee as little as 25,000 of death benefit before taking withdrawals or loans out the cash value of the policy. If you are planning on utilizing an IUL for supplemental retirement planning, this rider is amazing because you do not have to wait until almost all the cash value is depleted and the policy is about to lapse to pull the parachute and protect yourself from a major tax consequence.

Pacific Insurance Group’s team out of Bellevue, Washington specializes in all types of life insurance policies but are experts when it comes to index universal life insurance contracts. If you are in the market to purchase a policy, or would just like additional information please call 425-246-4222 or visit