Indexed Universal Life Insurance: What Are They And How Do They Work?

Indexed universal life insurance, or IUL as it is popularly known, is a type of permanent life insurance, which means it has a cash value component with a death benefit. 

The fund in the cash value account of the policyholder earns interest by keeping track of the stock market index that the insurer selects, like Nasdaq-100 or Standard & Poor’s 500. 

You may also get a fixed-rate account and may choose how much you want to put into each of the accounts. 

Although the interest rate that you derive from the equity index account may fluctuate, the policy will not offer a guarantee on the interest rate, which will thereby limit your losses. However, it may also cap your profits. 

These policies are more turbulent than the fixed universal life policies but are less risky in comparison with variable UL insurance policies where no investments are built in equity positions. 

Key Takeaways

• IUL insurance allows the policyholder to choose how much cash value they want to assign to an equity-based account and a fixed-rate account. 

• Indexed universal life is a type of permanent life insurance, and just like universal life, it offers flexible premiums and probably a flexible death benefit. 

• IUL insurance policies keep track of the number of popular equity indexes like the Nasdaq-00 or S&P 500 to earn interest credits. 

• IUL policies generally cap the returns you get and, at the same time, guarantee a minimum rate of interest. 

How Indexed Universal Life Insurance Works?

As with universal life insurance, the IUL policies also offer adjustable premiums. You may underpay or skip the premiums, and you may also be able to adjust the death benefit you receive. 

However, it is the investment of cash value that makes indexed universal life insurance different from others. 

When you choose an indexed universal life insurance policy, the insurance company helps you choose the index fund that you may use for all or a portion of the cash value segment of the policy and the death benefit. When you pay a premium on the account, a portion pays the cost of the insurance, depending on the life of the insured. A fee payment is done, and the rest adds to the cash value. 

The total cash value credits with any interest depending on the increase in an equity index. If you own an IUL policy, you may borrow against the cash value that accumulates in the policy. However, if you are not paying your loans back, the company will deduct that from your death benefit.

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Key Features Of Indexed Universal Life Insurance

While there are multiple other features that come with an IUL, these are the key features among them: 

• They offer permanent and lifelong coverage if the premiums are updated. 
• IULs come with flexible premiums and, apparently, a flexible death benefit. 
• IUls have a cash value, in addition to any possible growth of the value via an equity indexing account. 
• Cash value may be partially designated to a fixed interest option. 

Some of the policies may also allow the policyholder to choose multiple indexing options. 

Policyholders may decide the percentage they are allocated to the indexed and fixed accounts. The index value is thus put to record at the start of the month and compared with its value at the end of the month. If the index rises between the months, the interest adds to the cash value. The gains on the index credit back to the policy, either on an annual or a monthly basis. 

“IULs usually offer a guaranteed minimum fixed interest rate and a choice of benchmark equity indexes to track.”

– Investopedia.

People who are in need of a permanent life insurance protection but are willing to take advantage of the probable cash accumulation through an equity index may use IULs as crucial personal insurance for business owners, estate planning vehicles, or premium financing vehicles. 

Indexed Universal Life Pros And Cons

While indexed universal life insurance policies are feasible options for people who want permanent life insurance, they may not be for everyone. Life insurance of this type is way more expensive in comparison to term life insurance. However, IULs do offer you permanent coverage and a death benefit after your demise. 

The policy may also increase in value because of the cash value component, and you would also be able to borrow from your account. 

Advantages Of IULs

• Flexible premiums 
• Cash value accumulation
• Investment flexibility 
• Death benefit
• Lesser risk
• Easier distribution 
• Unlimited contribution 

Disadvantages Of IULs

• Caps on the accumulation percentage 
• Better for bigger face amounts 
• Based on a fluctuating equity index
• Growth will not include stock dividends
• Inclusion of management fees 

Indexed Universal Life Insurance Vs. Other Life Insurance Policy

Unlike the other life insurance types, the value of the IUl policy attaches itself to an index, which in turn is tied to a stock market. This indicates that the returns will vary depending on how the underlying index performs. 

Here are some of the other types of life insurance policies: 

Term Life Insurance:

This insurance offers a determined benefit if the policyholder passes away within a given period of time. This time is generally between 10 to 30 years. Term life insurance is extremely affordable, and the simplest out of them all. However, you do not get any cash accumulation here. 

Whole Life Insurance:

This is a more permanent insurance type and carries on for the entire life of the policyholder as long as they pay the premium. The police accumulate value as per a schedule, and there are fewer fees than a regular IUL policy. However, these policies do not come with adjusting premium flexibilities. 

Variable Life Insurance:

This comes with more flexibility than an IUL insurance policy, which means it is more complicated. The cash value of a variable policy depends on the performance of certain stocks or other securities. Your premium may also change. Because of this reason, variable life insurance is riskier than any other life insurance policy.

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The Bottom Line 

By now, I am hoping it is clear to you if IUL is a good investment. Indexed universal life insurance helps you fulfill the needs of your family for a financial protection while at the same time developing cash value. 

However, this policy is way more complex than other life insurance types., and they are not necessarily correct for every investor. 

You must first have a talk with an experienced life insurance agent or broker who can help you decide if the indexed universal life insurance is a good option for your needs.

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