Understanding Indexed Universal Life Insurance
Would you be interested in an opportunity to increase cash value while simultaneously securing the flexibility of adjustable life insurance premiums and face value prices? What if you could obtain this without any of the downside risks of investing in the equities market? You can have all of this when you adopt an indexed universal life insurance policy. These policies are not for everyone, so please read on to find out if this unique combination of investment growth and flexibility fits your needs.
What Does Indexed Universal Life Mean?
There are many variations of universal life insurance, including fixed-rate models and variable ones, where you choose certain equity accounts to invest in. In regards to indexed universal life (IUL), it is a policy that allows the policyholder to distribute cash value amounts to either an equity index account or a fixed account. Policies offer a spread of popular indexes, like the Nasdaq 100 or the S&P 500. There are pros and cons to each, for example, indexed universal life policies are more unpredictable than fixed universal life insurance policies, but have less risk than variable universal life policies due to there not being any money actually invested in equity positions.
Another benefit of indexed universal policies is that they offer tax-deferred cash accretion for retirement while simultaneously providing a death benefit. If an individual wants permanent life insurance protection while also taking advantage of cash accumulation via an equity index, then using an indexed universal life insurance policy might be the best option. This would be great for premium financing plans or estate-planning vehicles, along with insurance for business owners. Indexed universal life policies can be complex and difficult to explain, which is why they are considered an advanced life insurance product.
How Does Indexed Universal Life Work?
When a premium is paid, the money disperses into several areas, including paying for annual renewable term insurance, and any fees are paid that are associated with the policy. The rest is added to the cash value. The total amount of cash value is added to by the increases in an equity index. However, this is not directly invested in the stock market. As a benefit, some policies allow the policy owner to have multiple indexes. Indexed universal life policies give a choice of indexes as well as guaranteeing minimum fixed interest rates. The policy owner can choose the percentage assigned to both indexed and fixed accounts.
The value of the selected index changes each month. At the beginning of the month, the index is recorded and then compared to the value recorded at the end of the month. If there is an increase during the month, the interest is added to the overall cash value. The gains are then given back to the policy either on an annual or monthly basis. To demonstrate this, say an index gained 7% from the beginning of March to the end of that month, the 7% is multiplied by the overall cash value. Some policies calculate the index gains as the overall changes for that time period while other policies take an average of the daily gains for the entire month. The resulting interest is added to the cash value. However, if the indexes decrease instead of increase, then no interest is added to the overall cash value.
The participation rate is the gains from the index that are added to the policy based on a certain percentage rate. The particular percentage rate is decided by the insurance company and can range from 25% to more than 100%. Then the total cash value that is added can be found by multiplying the gain percentage, participation rate, and the current cash value.
Indexed universal life policies generally credit the gained interested to cash growths either once every five years or once a year.
What Are Some Advantages of an Indexed Universal Life Policy?
Flexibility: The policy owner controls the amount to put into indexed accounts versus a fixed account. Death benefit amounts can also be modified as needed. The majority of indexed universal life policies offer add-on riders, from no-lapse guarantees to death benefit guarantees.
Low price: The premiums are low because the policyholder bears all the risks involved.
Death benefit: Provides a permanent death benefit that is not subject to death taxes or income, and it is not required to go through any kind of probate.
The cash value increases: Any amounts added to the cash value grow tax-deferred. The policyholder can reduce or stop making out of pocket premium payments due to the cash value being able to pay the insurance premiums.
Easier distribution: The cash value is accessible at any time without penalty and regardless of the individual’s age.
Unlimited contribution: Indexed universal life policies have no annual contributions and no limitations.
Less risk: There is a decreased disk involved due to the policy not directly being invested in the stock market.
What Are the Downsides to the Indexed Universal Life Policy?
Superior for bigger face amounts: Lower face values offer limited to no advantages over regular universal life policies.
Based on an equity index: No interest is added to the cash value if the index goes down. Some policies can offer a low guaranteed rate for a longer period of time, but not all of them do. As a benchmark for performance, investment vehicles use market indexes with the goal of outperforming the index. The goal for indexed universal life is to profit from upward movements within the index.
Limitations on accumulation percentages: Maximum participation rates that are less than 100% are sometimes set by the insurance companies.
Final Thoughts on Indexed Universal Life Policies
Indexed universal life insurance policies are not for everyone. Still, they can provide a suitable option for those looking for the interest-earning potential of a variable policy with the security of a fixed universal life policy.
