Max Funded IUL - What to Know

Key Takeaway

Max-funded Indexed Universal Life (IUL) insurance policies can use maximized premium payments to potentially accelerate cash value growth. This may result in tax-advantaged wealth accumulation, including providing potential retirement income, while still providing a death benefit like any other IUL.

What Is a Maximum-Funded Indexed Universal Life Policy?

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.

Uses for a Max Funded IUL Table

Use Case	Explanation	Benefits
Tax-Deferred Growth	Max-funded IULs can allow for tax-deferred growth within the cash value account. Depending on how the policy is structured and withdrawals are taken, some distributions may be tax-free. Always consult a tax advisor for specific tax implications.	Potential tax-deferred growth, possible tax-free income depending on policy structure and withdrawal strategy.
Supplementing Retirement Income	A maximum-funded IUL can provide tax-advantaged distributions that may be used as supplemental income during retirement. However, withdrawals or loans must be carefully managed to avoid adverse tax consequences or policy termination.	Potential tax-free income during retirement, additional income stream, tax efficiency.
Market-Linked Growth with Downside Protection	IUL policies typically allow cash value growth based on the performance of a stock market index, such as the S&P 500. While there is no guarantee of returns, IULs often include a zero-floor feature, protecting cash value from negative returns.	Potential for market-based growth, downside protection, growth potential without risk of market losses.
Estate Planning and Wealth Transfer	The death benefit of an IUL can be structured to provide a tax-efficient transfer of wealth to beneficiaries. Cash value may also be accessed through loans or withdrawals, but doing so could reduce the death benefit and may have tax implications.	Potential tax-efficient wealth transfer, death benefit, flexible access to cash value during lifetime.
Access to Cash Value During Lifetime	Policyholders can typically access their IUL’s cash value through policy loans or withdrawals for financial needs. However, loans and withdrawals may reduce the death benefit and could lead to tax consequences or policy lapse if not properly managed.	Access to liquidity for emergencies or major expenses, financial flexibility.
Legacy Building	A max-funded IUL may provide long-term financial security for beneficiaries through a death benefit, and, depending on policy performance, the cash value and death benefit may increase over time. Market performance impacts the growth of these accounts.	Legacy planning with potential for both cash value and death benefit growth, long-term wealth accumulation.

Use Case

Explanation

Benefits

Tax-Deferred Growth

Max-funded IULs can allow for tax-deferred growth within the cash value account. Depending on how the policy is structured and withdrawals are taken, some distributions may be tax-free. Always consult a tax advisor for specific tax implications.

Potential tax-deferred growth, possible tax-free income depending on policy structure and withdrawal strategy.

Supplementing Retirement Income

A maximum-funded IUL can provide tax-advantaged distributions that may be used as supplemental income during retirement. However, withdrawals or loans must be carefully managed to avoid adverse tax consequences or policy termination.

Potential tax-free income during retirement, additional income stream, tax efficiency.

Market-Linked Growth with Downside Protection

IUL policies typically allow cash value growth based on the performance of a stock market index, such as the S&P 500. While there is no guarantee of returns, IULs often include a zero-floor feature, protecting cash value from negative returns.

Potential for market-based growth, downside protection, growth potential without risk of market losses.

Estate Planning and Wealth Transfer

The death benefit of an IUL can be structured to provide a tax-efficient transfer of wealth to beneficiaries. Cash value may also be accessed through loans or withdrawals, but doing so could reduce the death benefit and may have tax implications.

Potential tax-efficient wealth transfer, death benefit, flexible access to cash value during lifetime.

Access to Cash Value During Lifetime

Policyholders can typically access their IUL’s cash value through policy loans or withdrawals for financial needs. However, loans and withdrawals may reduce the death benefit and could lead to tax consequences or policy lapse if not properly managed.

Access to liquidity for emergencies or major expenses, financial flexibility.

Legacy Building

A max-funded IUL may provide long-term financial security for beneficiaries through a death benefit, and, depending on policy performance, the cash value and death benefit may increase over time. Market performance impacts the growth of these accounts.

Legacy planning with potential for both cash value and death benefit growth, long-term wealth accumulation.

Use Case

Tax-Deferred Growth

Explanation

Benefits

Potential tax-deferred growth, possible tax-free income depending on policy structure and withdrawal strategy.

Use Case

Supplementing Retirement Income

Explanation

Benefits

Potential tax-free income during retirement, additional income stream, tax efficiency.

Use Case

Market-Linked Growth with Downside Protection

Explanation

Benefits

Potential for market-based growth, downside protection, growth potential without risk of market losses.

Use Case

Estate Planning and Wealth Transfer

Explanation

Benefits

Potential tax-efficient wealth transfer, death benefit, flexible access to cash value during lifetime.

Use Case

Access to Cash Value During Lifetime

Explanation

Benefits

Access to liquidity for emergencies or major expenses, financial flexibility.

Use Case

Legacy Building

Explanation

Benefits

Legacy planning with potential for both cash value and death benefit growth, long-term wealth accumulation.

This is normally a comparative table on desktop, but is in a custom view on mobile.

How Max-Funded IULs Work

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.

Max-Funded IULs and Retirement

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.

Benefits of a Max-Funded IUL

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.

Who Should Consider a Max-Funded IUL?

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.

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The information above is for educational use only and does not represent insurance, tax, or legal advice. It is not a recommendation or solicitation to buy insurance. Please talk to your licensed insurance agent for more information about life insurance and your needs. Please consult with the appropriate professional for tax or legal advice. Guarantees are backed by the claims-paying ability of the issuing insurance company.

Article Author: Meredith Bell
Author Bio: Meredith joined Everly in 2022 and has 20+ years of experience in the life insurance industry. She has held various roles in advertising, marketing, communications, sales and distribution support, and product development. Outside of the office, Meredith lives with her daughter Kennedy and their dog Mavis. Meredith enjoys cooking, camping, gardening, hiking, and bourbon (though not always at the same time). She is a live music enthusiast and an avid reader. Her favorite quote is by Thomas Jefferson: "I cannot live without books." Meredith agrees, but would add cheese, movies, and dogs to that list.