What is Policy-Indexed Universal Life Insurance Exactly?
There are a ton of options when making the decision on the right type of policy to choose when considering life insurance; so it really can be confusing and difficult. This article has been designed to help you learn more about an available path to choose when shopping for life insurance; it’s called IUL, also known as indexed universal life.
This form of universal life insurance, which in its simple form is a kind of life insurance designed to offer protection for as long as the insured lives, and not for just a short period of time.
DEATH BENEFIT AND CASH VALUE
Policyholders that are being shielded under the whole life umbrella now have the chance to build cash value while enjoying a death benefit within the policy on a tax-deferred basis.
Considering the kind of life insurance you want to venture in, policyholders have the chance to invest their cash value in a variety of assets via the subaccounts. Like the Nasdaq 100, S&P 500 and Russell 2000, policyholders, through IUL can now invest their cash value directly in an equity index account.
A key difference that exists between the variable universal life insurance (VUL) and Indexed universal life insurance is that policyholders running the VUL have the chance to invest their cash value into bond subaccounts and stock similar to mutual funds. On the flip side, a policyholder running the IUL can only invest in an index account. Hence, this opens VUL policies to more volatility than IUL policies.
In addition to this, a guaranteed fixed interest rate is offered by IUL over the long term, and the policyholder is protected from any kind of loss, hence, making the insurance potentially less risky than VUL. Also, there may be a rise in the percentages of accumulation of an IUL policy, and this limits the return potential effectively.
HOW AN IUL POLICY WORKS
A part of each premium payment made on IUL is typically directed toward the insurance component of the plan, while another part is used to pay fees, and the remaining allocated to cash value. The interest rate and amount cut out for the plan is estimated based on the relative difference in the value of index selected at the start and end of the month, and the policy is credited with the gains on a monthly or annual basis.
For instance, if the index selected was able to acquire 4 percent in the month of November, the policy’s total cash value could have an additional 4 percent credited to its current cash value. If the index goes down in the 11th month, the cash value is credited with no interest, and none is subtracted either.
Bear in mind that the insurance company has the opportunity to set a rate that can effectively limit the interest rate to be credited to an IUL policy. This interest rate ranges from 20 percent to over 100 percent. So, if the index selected was able to acquire 4 percent in October, the cash value for the month would be $20,000, with 50 percent participation rate, including $400 increase to the cash value [(.04 x 20,000) x .5 = $400].
If you’re opting for life insurance, one of the limited types of policies offering the best is the IUL. Consulting a financial planner is also a good idea to help you decide on the best type of policy to choose for yourself and your family, considering the different options and complexities.