What is Equity-Indexed Universal Life Insurance?

Equity-indexed universal life insurance is a permanent life insurance policy. Because cash value accumulation in the policy is tied to the stock market, it’s considered a more advanced insurance policy that requires some additional know-how. Learn more about the way this type of insurance policy works and some of the reasons you might consider it.

Understanding Equity-Indexed Universal Life Insurance

This type of life insurance offers a cash value in the policy, which means you can borrow against or invest using the value. Once the value reaches a certain point, you can also use it to pay the insurance premiums so you have no out-of-pocket expenses for the policy.

You’ll be in control of how to invest the cash value using a range of funds and stocks based on their risk. The money sits in an equity-indexed account, allowing you to accumulate interest even if you choose not to invest the money. 

The policy will accumulate tax-deferred cash value based on your participation rate. It pays out a death benefit upon the policyholder’s death to offer a variety of protections for the financial well-being of the insured. 

How Equity-Indexed Universal Life Insurance Works

Equity-indexed life insurance (EIUL) works like many universal life policies. In exchange for lifelong coverage, you pay a premium for the insurance. As you pay your premiums and your investments perform, you’ll build a cash value in the policy. 

These policies are attractive because you can choose to skip paying the premium or underpay it and the funds will come from the policy’s cash value. That way the policy stays active even during hard times or changes in your finances.

If you find yourself in a situation where you want to change the death benefit value, you might have to undergo a medical exam like you would for term life insurance products. It all depends on how much death benefit you’re seeking, your age and other factors.

The policy’s cash value will increase in two ways:

1. You’ll earn a fixed interest rate based on the investments you’ve chosen.
2. Based on how your stocks or bond indexes perform, you can earn additional cash income.

You can choose to place the policy’s cash value in a fixed account, which grows at a rate the insurer sets. Or you can place it in an indexed account. Indexed accounts are more complex as they mirror a stock or bond index’s performance. You’ll have a variety of options for your indexed account. When the index increases, you earn interest. If it decreases, you won’t earn anything.

Indexed accounts also have minimums and maximums for earnings. You can’t earn above or below those set amounts and these are often set for the duration of the policy. That means that if the index goes up above the percentage that’s set as the maximum for your account, you’ll still only earn the maximum. For example, if your maximum is 5% but the index goes up 7%, you’ll only get the agreed-upon 5%. 

Another key term you’ll want to understand when it comes to these policies is the participation rate. This will restrict how much interest you can earn. When your participation rate is below 100%, you won’t earn as much interest as possible. Participation rates below 100% will further limit interest income. If your maximum interest rate is set at 10% but you only participate at 80%, you’ll earn 8% on your investments.

Pros and Cons of Equity-Indexed Universal Life Insurance

Before investing in an EIUL insurance policy, review the pros and cons to ensure it is the right financial move for you.

EIUL Pros

• Control: You’ll be fully in charge of how to invest in your policy. You can increase or decrease your premium payments based on your financial situation and can decide how much coverage you’re comfortable carrying at that time.
• Death benefit: While you’ll have access to many investment opportunities to help your money grow, you’ll also still have a death benefit to cover final expenses in case of your passing.
• Stock market returns: Because this is an indexed account, your cash value increases when the market does well, and that growth is generally tax-deferred.
• Lower risk compared to investing in the stock market: Because you’ll be investing in indexes instead of the market directly, you might see lower risk with this as an investment vehicle.

EIUL Cons

• Risk: The risk profile for this type of life insurance is more complex compared to other forms of insurance. The performance of your policy can be below your expectations, which could lead to a lapse in the policy if you stop paying premiums and the cash value is insufficient.
• Commitment: You can’t set up the policy and just let it be. You’ll need to participate in it and review its returns regularly to get a better feel for how things are going.
• Return maximums: You can’t earn above a certain percentage as set forth by the policy and your participation rate.
• Fees: Universal life policies have fees, which can further reduce the cash value in your account.

Universal Life Insurance with Large Upside Potential

For those who understand the complexities an equity-indexed universal life insurance policy presents and can maximize its returns, these policies can have considerable upside with tax-deferred growth. Discuss the option with your financial adviser to find a life insurance policy and investment vehicle that works best for you.

Frequently Asked Questions