Depending on the type of life insurance policy you choose for a LIRP, you could rack up many benefits and tax-related advantages. These can include generating a market-linked return on the policy’s cash value, but without any downside market risk.
For instance, with an indexed universal life (or IUL) insurance policy, the return on the cash value is based in large part on the performance of an underlying market index, such as the S&P 500 or the Dow Jones Industrial Average (DJIA).
In policy contract years when the index performs well, a positive return is credited to the cash value, typically up to a set maximum, or “cap.” But in return for this somewhat limited growth, in contract years, when the index performs poorly, the cash value will not lose money. Rather, it is credited with a guaranteed minimum, or “floor,” which is frequently in the range of 0% to 1%.
So, not only is your principal protected from market downside risk with an IUL policy, but you can also continue to build upon previous gains without first having to make up for any prior losses in the account.
Now, that’s a win-win situation!