What Is Indexed Universal Life Insurance?

Life insurance policies are typically sorted into two categories: term life and whole life. Term life insurance policies are policies that last for a certain term period, while whole life policies last the entirety of the insured’s life. 

Universal life insurance is a type of whole life insurance that incorporates an investment savings element. Universal life insurance policies, include the less common, but useful, indexed universal life insurance. These policies follow a common stock index that can potentially help you improve your rate of return.   

What Is Indexed Universal Life Insurance?

Indexed universal life insurance (IUL) is a type of insurance policy that allows you to allot a certain amount of your cash value to an equity index account or a fixed account. You can choose the amount of cash you wish to invest. The cash value is accumulated over time through the premium payments, and the interest paid on the cash value is based on the performance of the stock market. 

The premium payments for an IUL are typically lower, but there is more risk involved because your investment is tied to the performance of the underlying index. Unlike some other types of universal life insurance, indexed universal life insurance policies do not earn interest at a fixed rate. Instead, your interest rate is based on the performance of a stock index selected by your insurance provider. A stock market index is a measure of performance used to summarize the returns on a select bundle of investments. The Dow Jones Industrial Average is a commonly used stock index that may be tied to your indexed universal life insurance policy. 

How Does Indexed Universal Life Work?

An indexed universal life policy has both a death benefit and cash-value component, which are features found on all whole life insurance policies. While the death benefit is decided upon purchase of the policy, it is subject to change. You can usually choose to lower your death benefit at any time to fit your needs, but increasing your death benefit may require you to submit to a medical exam. The cash value accumulates interest based on the performance of the underlying index, which the life insurance company credits to your cash value portion, typically on an annual basis. 

IULs are more volatile than fixed universal insurance policies. A fixed universal policy has a fixed interest rate it is credited to, no matter the performance of the stock market as a whole. The cash values of indexed universal life policies can see considerable growth at time, but can also see years of decreased growth because of being subject to the volatility of the stock market.  

Insurance companies pay the interest based on the performance of the index; however, they usually choose the index that your policy tracks. Sometimes the insurer will give you a few options to choose from, and you may be able to select a policy that tracks more than a single index. If the index increases, the interest is added, but if it decreases, the cash value could earn lower returns than the overall market, which means it can be quite volatile when compared to fixed-rate policies. 

The interest gains are typically credited to the policy’s cash value either once a year or every five years. Some policies calculate the interest based on the index changes over a period, while others base it on the average gains over the span of a month.  

The amount earn is subject to caps and floors. This helps minimize large swings in the interest payments. The floor is considered the lowest interest rate your account can go to, while the cap is the highest rate your account can earn. If the market extends beyond the cap, you will still only get the interest up to the amount of the cap. However, the floor rate provides you with a certain level of account investment protection.     

Advantages of Indexed Universal Life Insurance

If you’re comfortable with the risk that comes with an indexed universal life insurance policy, this option can provide you with a more affordable way to secure permanent life insurance coverage. Advantages to this type of policy include:

• Low cost: The premiums on indexed universal life insurance policies are typically lower because of the risk involved with the investment. 
• Cash value: The accumulation of cash value is an advantage of all whole life policies, and indexed universal life insurance is no exception. The policyholder also has access to the cash without any penalty, which means you may be able to access your cash value in the event of an emergency while you’re still alive.  
• Tax advantages: The cash value grows tax-deferred, and the death benefit is tax-free once paid to beneficiaries.   
• The death benefit: The death benefit on these policies is definite for the beneficiaries. It also is not subject to death or income taxes under most circumstances. 
• Control: Policyholders are in control of the death benefit and payments, meaning they can adjust the amount allocated to the indexed accounts. Policyholders also get the option to lower or raise the premium payments as well as adjust their death benefits.  
• Interest rate guarantee: Most policies include an interest rate guarantee, which means that even if the index returns are low, there is a minimum interest rate that would still be paid.   

Drawbacks of Indexed Universal Life Insurance

An indexed universal life insurance policy has a few drawbacks because there is more risk involved when compared to fixed-rate accounts. 

• Accumulation limits: Participation rate maximums are sometimes set by the insurance company.
• Equity indexes are volatile: Because the policies are tied to a stock index, the interest is wholly dependent on how well the index performs over time. If the index sees a few years of inconsistent or poor returns, you might see your investment be outpaced by fixed-rate accounts. 
• Fees: IUL policy fees are flexible and always shifting. The fees will vary from one insurer to the next, but they can be costly and will sometimes dig into the payments you make and your accumulated cash value. These fees can also be dependent on the health and age of the insured.  

Compare Indexed Universal Life Insurance

Finding the best possible life insurance policy for the needs of your family begins by doing plenty of research and exploring all your options. Benzinga offers insights and information on the following indexed universal life insurance policy options. You may want to consider beginning your search for a policy with the links below. 

Shopping for Universal Life Insurance

No matter which type of life insurance you’re looking to purchase, it’s always a good idea to begin your search as early as possible. Life insurance rates are largely based on age, as health problems are more common later in life. This means that if you’re searching for a form of permanent life insurance (like indexed universal life insurance), you can lock in a lower rate by shopping for a policy early, while you’re still young and in good health.

Be sure to get a quote from a few competing life insurance providers before you choose where to purchase your policy. Getting a quote takes only a few minutes in most cases — and you might be surprised by just how affordable life insurance can be when you shop early.  

Frequently Asked Questions