Universal Life finds legs in uncertain 2014

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If you seek to safeguard retirement funds, an Indexed Universal Life (IUL) policy, which is a life-insurance policy that’s linked to a stock-market index, might be a good strategy in 2014, says Robert A. Fink of financial-planning company RAF Strategies.

An IUL policy hasn’t been a wise move during the past 5 years while stock prices doubled. However, “the markets are at all-time highs,” Fink says. “The question isn’t if the markets will go down, but when and how much.”

As of press time, signs indicated that the 5-year bull market was losing steam. In the first quarter 2014, the Standard & Poor’s 500 Index returned 1.8 percent, including dividends, compared with an average 7.3 percent return for each quarter of 2013.

Because an IUL policy is guaranteed against market losses, this investment tool protects and increases retirement principal—with limitations. An IUL policy has a 13 percent annual cap on earnings. “If the market goes up 10 percent, your account earns 10 percent,” Fink says. “If the market is down 20 percent, you don’t lose a dime.”

However, fees for the policy are somewhat expensive, at least at the beginning, he says. Almost all of the costs are paid during the first 10 years, when the average annual fee could be 2 percent to 3 percent of the policy, according to Fink. No continuing management or asset fees exist after that, unlike with mutual funds.

As a result, the strategy is appropriate for someone who is committed to being in an IUL policy for the long term and is willing to face the potential of missing out on a big return in exchange for no losses.