“Indexed universal life insurance (IUL) has its’ share of detractors. However, for some people
it may be a powerful tool in protecting and growing their wealth.” George Politarhos

By George Politarhos

Patria Wealth Group

I’ll be the first to admit, indexed universal life insurance isn’t for everyone. Depending on your
financial situation, goals, and risk tolerance, other forms of permanent life insurance, such as
whole life, might be a better choice.

However, high net worth individuals have long used life insurance to create liquidity at death
outside of the estate. The proceeds from life insurance may help pay off estate taxes or debts the
estate owes without substantially reducing federal estate tax exemptions. Such policies are
owned by an irrevocable grantor trust such as a life insurance trust (ILIT) or a dynasty trust.

While you can place whole life, limited pay life, or universal life in these estate liquidity trusts,
many estate planning attorneys and advisors I know use indexed universal life insurance or
IUL to fund trusts. Planners may prefer IUL because it gives them tax advantages, flexibility, and more
significant upside potential. Term life won’t do the job because it eventually expires, or the
premiums become prohibitively expensive.

IUL stands apart from other insurance solutions for estate planning because it allows you to use
leverage in as few as three policy years to self-fund. This process is called dupli- funding, or
hyper funding.  As it relates to indexed universal life, dupli-funding is the process of
borrowing against a policy’s cash value. You then use some or all of the proceeds to make
premium payments.

Employing what is known as a participating loan,someone could
theoretically take out a policy loan at a low percentage rate. They would then use that loan
money to make premium payments that might generate higher earnings. Successfully executed,
this tactic (leverage) means the long-term premium outlay for an IUL might be only a fraction of
that required for other types of permanent life insurance. Additionally, there are IUL products
with increasing death benefit options that, over time, will pay larger death benefits.

Using IUL in an estate planning context requires careful management. You must monitor your
policy so that it remains sufficiently funded, or it might lapse due to ongoing loan interest and
policy expenses. A general rule of thumb for loans is that you should never let your loans exceed
70-80% of the total cash surrender value at any time. It would be best if you were wary of over-
borrowing, which is another common reason these policies lapse.

When using IUL, you must also pay special attention to ensure that additional cash invested in
the policy does not cause your policy to become a Modified Endowment Contract (MEC), as
defined by the IRS. If a policy becomes a MEC, you cannot undo that designation. When a
policy is a MEC, it loses most of the tax advantages that initially made it a viable choice for an
estate plan. Fortunately, special software is available to assist estate planners in modeling a
policy's performance, safeguarding against a lapse, and avoiding a potential MEC situation.

Basics by George: In the hands of seasoned financial professionals and estate planners, indexed
universal life insurance may be a powerful tool. IUL may be particularly useful for those whose
net worth demands more aggressive estate planning in the form of irrevocable, non-amendable
trusts, such as ILITs.

As long as premiums are carefully monitored and paid correctly, IUL will give you permanent
coverage and significant tax advantages. However, there are some drawbacks to using IUL,
including higher risk than other vehicles offering guaranteed rates of return. IUL contracts also
include caps on returns and have no market returns guarantees.

If you are thinking of purchasing an indexed universal life insurance policy for any reason,
including estate planning, be sure you understand precisely how these policies work. You want
to know not only the potential benefits but also any pitfalls and tax implications, internal costs,
and risks. Ask your estate planning attorney, CPA, or other financial professionals for assistance.

Need a second opinion?  We are glad to help anyone anywhere in the USA

Make an appointment with George Politarhos here:


Phone: (877) 236-3705
501 Silverside Rd.
Suite 31
Wilmington, DE 19809