Section 7702 was added to the Internal Revenue Code in the mid 1980’s. It was the first formal attempt by the IRS to define what is (and isn’t) life insurance and entitled to the tax benefits associated with life insurance (tax deferred cash value buildup, tax free death benefits and non-taxable access to cash values via borrowing). It codified a definition for whole life (an existing life product) and created an totally new set of rules allowing for a new “universal” life product structure. Almost three decades later “index” universal life was created. It addresses the volatility problem inherent in “variable” UL creating a hybrid product that uses index options as the investment engine driving cash value growth.

There are (or soon will be) a series of write ups discussing how index universal life (IUL or IL) is structured. It’s design is both simple in concept but incredibly complex in its design features available to IUL buyers. That said, as with stock market and investment funds, complexity is not a reason to avoid the product. Instead, it is a reason to own the product in that its operational complexity does not involve ongoing decisions by IUL policy owners. It simply relates to the operation of the internal workings of the product that serve to allow for benefiting from upside stock market returns without being exposed to losses.

The stock market historically declines two or three times per decade and goes up seven to eight times. The ability to benefit from the greater number of upturns without losing back prior gains to subsequent declines is the beauty of the IUL product design. While the upside is “capped” so that extreme upturns are not fully enjoyed, the ability to eliminate losing back prior earnings more than offsets this. The IUL product, if there is such a thing, is the perfect life insurance product for those who recognize term insurance is a product that ends badly for all but those who die young. Anyone with a desire to “win” if they live by accumulating substantial cash values they can access on a non-taxable basis in retirement and still protect their family if they are unlucky enough to die will find IUL to be the best possible life product choice. It is a “buyer be-aware” product worth every minute it takes to understand how it works.