Indexed Universal Life Insurance


Indexed universal life insurance is a variant of universal life insurance. With indexed universal life insurance, policyholders have the flexibility and control over premium payments, death benefit levels and other features that goes with universal life, while also having additional growth potential for the cash value of the policy.

The reason it’s called “indexed” universal life is because the policy’s cash value accrues interest at a rate linked to the upward movement in a pre-determined stock market index. This means that when the stock market performs well, the policyholder’s cash value will grow faster as well.

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Indexed Universal Life Example

Lucy and Bob are 30 years old and want to buy a permanent insurance policy that will also offer cash value growth over time. They are savvy about insurance and understand how to manage their policy, and they want to be able to adjust their insurance policy to adapt to changing needs.

They currently have only one child, and they’re not sure how many more children they want to have, so they want to be able to increase the death benefit if more children come along. Lucy stays home with their baby and has no income, and Bob is self-employed and his income varies from month to month, so they also want the option of being able to skip payments. This makes universal life insurance a good option for them.

Although Lucy and Bob are pretty risk tolerant with their overall investments and they want their life insurance cash value to grow, they also don’t want to run the risk of losing money with their life insurance. For this reason, variable life insurance is probably not the best option – there is the chance of higher growth with variable life, but also the chance of losses.

Instead of risking losses, indexed universal life insurance will offer Lucy and Bob the chance of higher returns on their policy’s cash value, while also protecting them from the downside of the market – even if the stock market loses value, their cash value will still earn a certain minimum rate of interest.

For these reasons – their desire for flexible payments and benefit choices, and their desire for higher cash value growth potential without the downside risk – Lucy and Bob should consider buying indexed universal life insurance.

Difference Between Indexed Universal and Other Types

Indexed universal life insurance is similar to universal life insurance in most ways: it offers permanent coverage (as opposed to term life, which is temporary), and it still allows policyholders to make their own choices about how to schedule premium payments, how much to pay, and how to adjust the level of death benefit.

Indexed universal life insurance, like universal life insurance, is ideal for policyholders who want a policy that can evolve to meet changing life circumstances and financial needs.

The primary difference between indexed universal and standard universal life insurance is that indexed universal life insurance has a different way of crediting interest to the cash value account. With universal life insurance, the cash value grows at a fixed rate of interest determined by long term cash equivalent investments made by the insurance company – and these interest rates are usually very low, often 2% or less, depending on the market.

Indexed universal life insurance ties the performance of the cash value to the performance of a stock market index – often the S&P 500 or other broad indices. This can result in higher growth in any given year, as stocks often earn higher returns than money market funds.

Of course, stock markets can go down as well as up – but that is not a risk for policyholders who buy indexed universal life. The cash value of an indexed universal life insurance policy is guaranteed to never be negative. Even if the stock market loses value, the policyholder is still guaranteed to receive a minimum percentage of interest. This makes indexed universal life a more conservative financial move than variable life insurance, which is exposed to the full ups and downs of the stock market.   

Who Should Buy Indexed Universal Life

The best candidates to buy indexed universal life are people who want more flexibility and control over the premium amounts, payment schedules, death benefit level and other features of their life insurance policy, while also desiring greater potential for growth in their cash value. Indexed universal life is best for people who are savvy about insurance and who are prepared to exercise greater responsibility in managing their policy – it’s more of a “hands on” product than whole life insurance or term life insurance, for example.

Indexed universal life is also ideal for people who want higher growth in their cash value than they can get from whole life, while still taking a more conservative approach than variable life insurance.

Alternatives to Indexed Universal Life Insurance

The main alternatives to indexed universal life are variable life and universal life insurance.

Variable life insurance is a more aggressive investment than indexed universal life. With variable life, the cash value is invested in stock and bond funds in separate accounts, similar to a mutual fund. This means that variable life policyholders have the potential for higher growth in the policy’s cash value, but also are exposed to the downside risk if the market drops. Variable life has the potential for loss as well as gain.

Universal life insurance is the other major alternative. It is similar in most ways to indexed universal life, but the cash value does not have as high of potential for growth. Universal life insurance also tends to be less costly than indexed universal, as people usually pay more to have the higher potential for cash value growth.

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