IULs are a form of permanent life insurance that accumulates cash value through interest based on an external index strategy. Typically, this looks like tying the cash value account to a stock market index, such as the S&P 500. These IUL policies remain in effect so long as the premiums are paid on time and in-full, or until the policy’s maturity date.

So, what does ‘max-funded’ mean, and how can it apply to your IUL? A maximum-funded IUL is designed to maximize your cash value accumulation by effectively minimizing the cost of the life insurance itself. This means you may be able to maximize your premium payments into your IUL policy to accelerate the financial growth of the cash value account.

With this method, you may be able to prioritize cash accumulation over your death benefit. Some individuals use this strategy as an attempt to turn their IUL policy into a financial tool that may be able to build wealth and supplement retirement income.

Those who want to increase their chances of accumulating more funds for the cash value account in their IUL may try by contributing the maximum allowed premium each year. This should exceed the amount necessary to cover the cost of your life insurance, with the excess of these IUL payments funneled into the cash value account.

These excess funds can then potentially grow through interest credited based on the performance of the market index it’s tied to. So, why try this financial maneuver with an IUL versus any other life insurance product?

Some policyholders prefer to maximize their premium payments on an IUL because IULs typically offer a floor on returns. This means that if the index performs poorly, you may be able to protect your funds from market downturns and potentially even receive gains. 

Maximum-funded IULs are typically best for individuals still in their working years to increase the amount of time your cash value account must grow. Once you reach retirement, you will usually be able to take income tax-free distributions from your policy to potentially supplement other sources of retirement income.

However, always review the terms and conditions of your IUL policy. You don’t want to deplete your cash value account, as that may terminate your policy depending on your contract. Policyholders may want to closely monitor their IUL to ensure it has enough value to continue to provide income support.

In addition to potentially providing supplemental, tax-advantaged support for retirement, there are other potential benefits to maximizing your IUL premiums:

Tax-Advantaged Growth

When you’re funding in your policy’s cash value account grows, it typically does so tax-free. With tax-advantaged growth, you may not have to worry about taxes on your financial gains until you begin withdrawing from the account. 

This usually means you do not have to pay taxes on this money or its gains until you begin making cash withdrawals. There may be certain qualified withdrawals you can make during retirement that can be paid income tax-free.

Higher Return Potential

It’s important to note that an IUL is not a guarantee on returns. However, IULs have the capacity to out-perform your traditional savings accounts over time, and the zero-floor of an IUL may allow your overfunded account to participate in capped stock market gains.

Annual Reset

Depending on what your IUL policy is tracking yearly, there may be an annual reset. An ‘annual reset' means that each year, the policy’s interest calculation starts again based on the index’s performance over that specific year. This also can mean any financial gains from the previous year are secured and protected from future market downturns. If this is the case for your policy, it can allow for potential financial growth and protection against future losses.

Death Benefit and Cash Withdrawals

Max-funded policies are still life insurance policies. This means your IUL can still have all the financial benefits and features a typical IUL would have. For example, you may be able to access your IUL policy’s cash value through a withdrawal or policy loan.

This can provide liquidity for emergencies or other big-life moments, such as a down payment on a mortgage. However, review the terms of your IUL, because withdrawals may be taxed as income depending on when you withdraw and how.

Additionally, your death benefit may increase alongside the cash value account. However, this depends on your IUL policy choices and the stock market performance. If the death benefit increases, you may be able to provide your beneficiaries with a more valuable financial inheritance upon your passing.

Maximizing premium payments on an IUL isn’t always the right choice for everyone. This type of policy may be a good fit for high-income earners who wish to reduce their taxable income because the cash value account can accumulate wealth tax-free until withdrawn.

Individuals planning for retirement may also prefer to accumulate wealth in the cash value account tax-free. Tax rates can impact retirement income. These IULs may be able to provide supplemental retirement income through tax-free distributions.

Estate planners and risk-averse investors may also consider this type of IUL. For estate planners, this type of product can provide a death benefit to beneficiaries while also providing cash value for the policyholder that they can access in their lifetime. For others, IULs can provide equity market risk, return for growth, and protect against losses.